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J 

THE GREAT COLLAPSE 


Higher Fares 

OR 

Public Ownership 


BY 

LOUIS WALDMAN 

it 


{ 

Introduction by 

SCOTT NEARING 


New York 

PUBLIC SERVICE PUBLISHING COMPANY 
1919 


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APR -9 1920' 



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Mp Brother , Morris lYaldman 












PREFACE 


9 I *HE general chaotic condition of our trans- 
* portation facilities and the threatened and 
accomplished bankruptcies have convinced the 
writer of the supreme need for a popular explana¬ 
tion of the whole problem of private ownership 
and management of public utilities. The per¬ 
sistent campaign of the traction trust for an in¬ 
crease in fares, not only in New York but in al¬ 
most every large city in the country, has been 
calculated to convey the impression that the rail¬ 
road companies are great public benefactors im¬ 
posed upon by an ungrateful public. 

A concerted effort is being made, in many cases 
successfully, to hold up the public for more loot. 
In this city, although some ground has already 
been lost by the extra charge for transfers, the 
people are still holding out against further en¬ 
croachment by the corporations. 

To strengthen the hand of the people in their 
fight, to equip them with arguments, facts and 
general knowledge of the situation, is the purpose 
of this book. 

Although written with special reference to New 
York it is nevertheless of general interest because 
the essential features of the railroad problem in this 

5 


6 


PREFACE 


city are the same as those in most of the cities in 
the country. Moreover, the methods the corpora¬ 
tions pursue, the modes of business organization, 
the general laws of development of the traction 
system in this city partake of the general character 
of modern large industry. The suggestions for 
legislative relief here made are, with slight varia¬ 
tions, applicable to the national railroads as well 
as to most of the other socially necessary in¬ 
dustries. 

Having in mind the difficulties the average per¬ 
son has in understanding technical business terms, 
such as amortization, common stock, preferred 
stock, bonds, corporations, leases, operating agree¬ 
ments and holding companies, it has been deemed 
advisable to devote the first few chapters to an 
explanation of the meaning of these terms and of 
the modern instruments of business organization. 
Once the reader has secured a clear knowledge 
of these, he will have no difficulty in following the 
facts related in the subsequent chapters. 

This book will have achieved its purpose if it 
succeeds in revealing the obscure operations of the 
traction trust and throws some light on the per¬ 
plexing problems which are pressing hard for im¬ 
mediate solution. 


PREFACE 


7 


Armed with the knowledge of the methods the 
capitalists employ, the reader will be able to judge 
for himself whether the claims made by the de¬ 
fenders of the present order of private ownership 
of social needs are correct, or whether the claims 
of its assailants, the proponents of the new system, 
the system of social ownership and democratic 
management of industry, are correct. 

The traction problem in New York presents 
amazing incongruities. Busy trains, crowded 
cars, comparatively short trips, and yet the com¬ 
panies complain and show figures proving that they 
cannot successfully operate on a five cent fare! 
The following study exposes their deceptive and 
vicious practices and shows their “proof” fal¬ 
lacious. It clearly demonstrates the financial pos¬ 
sibilities of operating the lines successfully on even 
less than a five cent fare. 

The circumstances of the recent bankruptcies 
are given at the very outset, in order to enable the 
reader to see for himself the extent to which the 
lords of high finance are permitted to go under 
their own capitalist-made laws to cajole the public 
into doing their bidding. 

Many public documents and official reports 
have been issued, containing all the facts of the 


8 


PREFACE 


case, but owing to the bulk and dry nature of 
these reports the facts have escaped the notice of 
the public. The story stating the plain facts in 
plain language has not yet been written. As far 
as the writer knows this is the first attempt. 

While it is undoubtedly true that private owner¬ 
ship and management of public utilities is the 
source of the existing inconveniences, high rates, 
and general chaos, it is not sufficiently convincing 
merely to say so; such conclusion must be backed 
by showing specifically where this private owner¬ 
ship is responsible for these evils. 

And even this is not sufficient. It is necessary 
to point the way out of the difficulties. General 
proposals, such as “public ownership is the 
remedy,” may have been well enough when it 
was confined to the domain of propaganda, but 
not when it enters the realm of practical legis¬ 
lation. The time has arrived when it is essential 
that we get a clear idea of what our proposals 
really mean. 

Only by educating people to the real meaning 
of public ownership can there be created an en¬ 
lightened public opinion to resist the enactment of 
sham reform measures, parading under the popular 
name of public ownership. The various phases of 


PREFACE 


9 


public ownership are discussed in the last few 
chapters. It should be borne in mind, however, 
that the suggestions there made are not offered as 
ultimate solutions, but as steps to secure immediate 
relief while the present system of private owner¬ 
ship still predominates. 

In publishing this little volume, the writer is 
indebted to Miss Sylvia Miller and Gertrude 
Weil Klein for their kind assistance in preparing 
the manuscript, and to his friend William Morris 
Feigenbaum for his kind assistance and valuable 
suggestions. 


L. W. 






* 




INTRODUCTION 


r | ’HE economic history of the United States is 
*■* wonderfully enriched by the records of the 
street-railway organization. Capitalism, at its 
best and at its worst, is mirrored in the transactions 
that have turned hundreds of millions in city 
franchise values over to a clique of private ex¬ 
ploiters, who have made it a point to use the ad¬ 
vantage of their monopolistic position to fill their 
own pockets. Through the whole story, there is 
no known instance where the street railways, un¬ 
der private management, have been operated for 
the purpose of furnishing transportation. Instead, 
transportation was furnished as a means of making 
money. Profit—not service—is the aim of this, 
as it is the aim of every other part of the capital¬ 
istic organization of our economic life. 

The tale is simple, consecutive and dramatic. 
The capitalists came; they saw; they appropri¬ 
ated. Thereafter they reaped millions in profits. 

As the cities grew, and it became impossible 
for people to walk or drive to their work, their 
trade or their pleasure, a need arose for some 
means of quick, dependable, cheap transporta¬ 
tion. The streets were there—graded and paved. 


11 


12 


INTRODUCTION 


Plainly, those who could get the right to the use 
of these streets, for the transportation purposes, 
had a source of immense income value. 

Promoters recognized the value of these fran¬ 
chises. Office-holders, as the trustees of the public 
rights had it in their power to dispose of them— 
almost as they chose, until the immensity of the 
issues at stake were called to public attention. 
The result was easily foreseen. The politicians 
sold, the financiers bought. There ensued that 
disgraceful period of corruption, during the forty 
years following the Civil War, that has made the 
municipal government of the United States a by¬ 
word among students of public affairs in all parts 
of the world. 

The financiers, once in possession of the fran¬ 
chises, manipulated, leased, rented, consolidated, 
merged, combined. Watered stocks flooded the 
markets. Preposterous contracts were made. 
Millions in social values were pocketed by men 
who never turned a hand to render a public service. 
These financial transactions, and these contracts 
form the basis for the demands that the street- 
railway interests are at present making upon the 
American public. 

For years the people have been paying huge 


INTRODUCTION 


13 


returns on stolen, inflated values. Now costs are 
rising. It is becoming difficult or impossible for 
the companies to live up to the robber agreements 
planned and executed during the past fifty years. 
So the people are asked to pay again. 

No one has stated that passengers cannot be 
carried at the present rate of fare. The Cleveland 
experiment has amply proved the contrary. It is 
contended that at the present rate of fare, vested 
interests in stolen property cannot be compensated 
at the rates agreed upon among the original 
thieves. 

The following pages tell this story for New 
York, a story that every New Yorker must know 
if he expects to deal intelligently with the traction 
controversy during the next few months. The his¬ 
tory of New York traction is typical—therefore 
it is doubly important. It is a symptom—pointing, 
inexorably to the disease. 

The story of the street-railway debauchery, 
told here for New York alone, has been repeated 
with sickening uniformity in one American city 
after another. The amounts involved in New 
York are larger. The principle everywhere is 
the same. 

The experience which the people of New York 


14 


INTRODUCTION 


and other American cities have had with their 
street railways is broad enough and bitter enough 
to convince even the most skeptical that the only 
safe place for public property is in public hands. 
Private ownership of public utilities means private 
profits from public sources. The people must 
own if they are to rule. 


Scott Nearing. 


CONTENTS 

PAGE 

Preface. 5 

Introduction. 11 

CHAPTERS 

I. The Collapse. 17 

II. The Corporation—As Instrument of Busi¬ 
ness Organization and Concealer of 
Profits. 29 

III. The Combination. 46 

IV. The Holy Alliance. 53 

V. The Lease. 63 

VI. The Holding Company. 73 

VII. Franchises—How They are Obtained. ... 81 

VIII. Stealing the “Underground Hole”—Sub¬ 
way Contracts of 1900-1902. 99 

IX. The Notorious Partnership—Subway Con¬ 
tracts of 1913. Ill 

X. “Dead Capital” Earning Money ... . 125 

XI. Punishing the Public for Its Tolerance— 

Amortization the Means. 135 

XII. The Bankruptcy of Regulation. 152 

XIII. Municipal Ownership We Do Not Want. 166 

XIV. Public Ownership and Finance. 185 

XV. Public Ownership and Administration... 197 

XVI. Public Ownership and The Workers .... 205 

XVII. Public Ownership and Socialism. 209 


15 































Chapter I 
THE COLLAPSE 


r I 'HE Brooklyn Rapid Transit System offi- 
cially collapsed on December 31, 1918. 
From the standpoint of service there had been 
nothing to collapse. Its greatest efforts had been 
in the direction of extracting nickels from the 
people’s pockets to the extent of almost $30,- 
000,000 annually. 

To the traveling public the B. R. T. has be¬ 
come a veritable torture. It is a common jest that 
the B. R. T. is the railroad that makes walking a 
pleasure. It is as safe to travel on a B. R. T. 
train as it is to be on a ship sailing in mined waters. 
Of late, accidents on this system have been a 
common occurrence. 

The bankruptcy of this company, therefore, 
will not be mourned by many. The people see 
in it a hope for relief. Perhaps, at last, public 
officials will bestir themselves to solve the problem. 

“Judge Julius M. Mayer of the United States 
District Court,** said Timothy S. Williams, presi¬ 
dent of the B. R. T., on January 1, 1919, “to-day 
made an order appointing ex-Secretary of War 


17 


18 


THE GREAT COLLAPSE 


Lindley M. Garrison receiver of the Brooklyn 
Rapid Transit Railroad Company, the New York 
Municipal Railroad Corporation, and the New 
York Consolidated Railroad Corporation, these 
two being subsidiaries of the Brooklyn Rapid 
Transit Company. The order was made upon 
the application of the Westinghouse Electric 
Manufacturing Company, a creditor, for material 
furnished. The companies did not oppose the 
action , for they felt that they would be subserved 
by a temporary receivership * 

“The immediate requirements were meeting, 
January 1st, obligations for about $2,000,000, 
and this could have been obtained * but to com¬ 
plete the construction and equipment work now 
under contract and to provide for additional ex¬ 
penditures for similar purposes during the coming 
year, will require the raising of many millions 
more, and the general situation affecting street 
railroads, with their stationary fares and rising 
costs, had injured their credit and made impos¬ 
sible up to the present time provision for the in¬ 
vestment of fresh capital.” 

Col. Williams goes on to state that “the effort 
on the part of the company to restore rates of 


* Italics are mine. 



THE GREAT COLLAPSE 


19 


fares authorized by their franchises or to get the 
right to charge fares sufficient to meet the costs of 
service, has thus far failed.” 

Three things are clear from this statement. 

First—The company, for the B. R. T. is real¬ 
ly only one company, contends that a five-cent 
fare, which it had agreed to charge, is no longer 
“sufficient to meet the costs of service,” and that 
all its effort “to get the right to charge” a seven- 
cent fare “has thus far failed.” 

Second—That the company did not have to go 
into bankruptcy at this time. It could have met 
its obligations to the Westinghouse Electric Manu¬ 
facturing Company, but chose this course because 
of its apparent inability to raise money for prob¬ 
able needs in the future. It “felt” that its interest 
“would be subserved by a temporary receiver¬ 
ship.” 

Third—That President Williams did not op¬ 
pose the application of the creditor company. On 
the contrary, he joined in the petition of the plain¬ 
tiff company that the Federal Court take over the 
property for the protection of the creditors, bond¬ 
holders and stockholders. 

Professor Gerstenberg of New York Univer¬ 
sity says that a receiver is supposed to be “an 


20 


THE GREAT COLLAPSE 


impartial person* appointed by an equity court to 
hold and administer any property which is the 
subject of litigation.”f 

Travis H. Whitney, a former Public Service 
Commissioner, was quoted in the New York Times 
of January 1, 1919 as having said that Mr. Gar¬ 
rison was named receiver at the suggestion of 
George D. Yoemans, counsel of the B. R. T. 
Moreover, only one week prior to his appointment, 
Mr. Garrison was selected by the company as its 
representative on an arbitration committee to de¬ 
cide whether the large awards likely to grow out 
of the terrible Malbone Street accident should be 
charged against operating expenses. 

Obviously Mr. Garrison does not exactly meet 
the test of Professor Gerstenberg’s definition. He 
is an acknowledged friend of the Brooklyn Rapid 
Transit Company. 

All circumstances seem to indicate that this 
receivership was staged for the benefit of a public 
unwilling to grant increased fares to the traction 
companies of the city. 

On the 2nd day of January, 1919, taking ad¬ 
vantage of the excitement caused by the collapse 


* Italics are mine, 
f Modern Business, page 164. 



THE GREAT COLLAPSE 


21 


of the Brooklyn Rapid Transit System, Theodore 
P. Shonts, president of the Interborough Rapid 
Transit Company, sent a letter to the Public Ser¬ 
vice Commission and the Board of Estimate and 
Apportionment renewing his former application for 
permission to charge higher fares. He did better 
than his sister companies, requesting an eight-cent 
fare for his system. It was, of course, the psycho¬ 
logical moment to insist that “the city can gain 
nothing by starving the Interborough into bank¬ 
ruptcy.”* 

The New York Railways Company, a street 
surface railway corporation, holding the club of 
bankruptcy over a frightened public, came with a 
like request. In a word, all the important traction 
systems of New York received an irresistable im¬ 
petus in their demand for increased fares. A sys¬ 
tematic campaign has been launched in the press. 
The statements of the companies, interspersed 
with spicy and friendly journalistic arguments, 
are published on the front pages, f 

The reactionary section of the press, true to its 
mission, has taken up the fight on behalf of the 

* N. Y. Times, January 1st, 1919. 

f Since this chapter was written, the New York Rail¬ 
ways Company has been placed in the hands of a 
receiver, Mr. Job E. Hedges. 



22 


THE GREAT COLLAPSE 


corporations with great zeal. It employs the usual 
tactics of appealing to the people’s good nature 
and extreme sense of fairness. It understands 
how the plain people abhor driving anyone to 
ruin. Thus, the New York Times of January 3, 
1919, in an editorial entitled “77ie City's Re¬ 
sponsibility said: 

“The remedy of increased fares which has 
averted bankruptcies in so many other cities is the 
one indicated here.*’ 

In a long editorial protesting innocence of any 
unsound financial dealings on the part of the com¬ 
panies, and bewailing the “loss and ruin to the 
unfortunate investors,’’ the New York Sun of Jan¬ 
uary 3, 1919, said: 

“Now there is only one way out of affording 
relief to the companies. It is to convert the aver¬ 
age loss on every passenger carried into an average 
gain. The companies have no way of making 
money save out of passenger fares. The present 
fare nets the loss from which the companies are 
perishing. Obviously the fare must be raised. 
Nothing seems to afford an alternative to this 
course.’’ 

Fortunately, the concerted effort of the press 
creates no impression on the people. The appeals 


THE GREAT COLLAPSE 


23 


seem to fall on deaf ears. There is little sympathy 
for the companies. 

The Brooklyn Rapid Transit Company trains 
run as usual, if not with greater regularity. There 
is no difference as far as the public is concerned 
whether the company is technically solvent or not. 

The old conception of bankruptcy is obsolete. 
It has changed with the introduction of new 
methods in business organization. The railroads 
are no longer in the hands of individual propri¬ 
etors. They are now carried on by corporations. 

When the individual proprietor was declared 
bankrupt he personally suffered. There was a 
human touch in his plight. Socially it was a 
calamity to him. The debts he could not pay and 
which drove him to bankruptcy he usually owed 
to people he knew. They were members of the 
same church, of the same club, of the same com¬ 
munity with him. They thought highly of him 
and he cherished their good will. He who had 
been a reputable citizen in the community now 
would be a marked man. Economically he was 
even more to be pitied. It meant his complete 
ruin. He would become absolutely helpless. His 
entire wealth, including his personal property. 


24 


THE GREAT COLLAPSE 


could be taken from him to discharge his obliga¬ 
tions. It may have meant unmitigated poverty 
for himself and his family. Such possibilities 
evoked sympathy and fear. 

The Brooklyn Rapid Transit bankruptcy or, 
for that matter, most corporation bankruptcies, 
are “business’* affairs. There is no human ele¬ 
ment. The history of the traction system in New 
York City is the history of bankruptcies and re¬ 
organizations. For the press to continue to play 
the chord of sympathy is useless. 

Public utility corporations in New York seem 
indeed to thrive on bankruptcies. After each 
failure, instead of reorganizing the business on a 
sound basis, eliminating the causes that led to the 
insolvency, just the reverse has been done. Not 
only have the poisons that ate the system’s financial 
tissues, bringing it to ruin, been retained, but more 
of them were added. They multiplied weakness 
upon weakness with every reorganization. Every 
attempt on the part of government commissions to 
place the companies upon a solid footing has been 
fought bitterly. The investors, bankers and trust 
companies, the real controllers of the transit sys¬ 
tems, seem to feed on the weaknesses of corpora¬ 
tions, as vultures feed and grow fat on corpses. 


THE GREAT COLLAPSE 


25 


The New York Railways Company, which so 
loudly protests its innocence of corporate wrong¬ 
doing, is a classic example of corporation brazen¬ 
ness. This corporation is erected upon the ruins 
of the Metropolitan Street Railway Company. 
In 1911, when the organizers of the new corpora¬ 
tion applied to the Public Service Commission, 
then in its infancy, for permission to issue new 
securities, the latter, upon a careful examination 
of the properties and a study of its outstanding 
debts, declined to grant the application. The Com¬ 
mission claimed that the securities the company 
sought to issue would be far above the physical 
value of the property; that if the securities as pro¬ 
posed by the companies were issued the system 
would be based on a false foundation and would 
lead either to excessive charges in the way of fares 
or to bankruptcy. The companies, instead of dis¬ 
proving the contentions of the Commission, turned 
to the courts for assistance. The courts held that 
the Commission had no right to look into the securi¬ 
ties issued by a reorganized company if the issue 
did not exceed the aggregate debts of the con¬ 
stituent companies. 

The New York Railways Company was quite 
willing to avail itself of this decision to prevent 


26 


THE GREAT COLLAPSE 


the Public Service Commission from protecting 
“poor unfortunate investors,” as well as the great 
mass of fare-payers from being robbed. 

One item for which the company issued securi¬ 
ties was $4,740,000 to cover “Initial payments 
for franchises” and “Interest on franchise security 
deposits,” which was never spent on these items; 
at least, such an amount was never spent. The 
company does not disclose who got this money. 
Under the head of “Organization and Finance,” 
the company issued securities to cover $8,149,580. 
The items making up this huge sum consist of such 
well deserved and indispensable expense as “Pay¬ 
ments to underwriting syndicates,—$2,400,000.” 
The results of the issue of such securities will be 
shown in detail in a later chapter. 

The Commission refused to give its consent to 
this gross imposition upon the public pocketbook. 
It was later directed by the court to give its ap¬ 
proval to the company’s application, and it did. 

The companies won. They did not win by 
proving the charges of over-capitalization made 
by the Public Service Commission to have been 
false. They did not win by proving that for every 
dollar of security issued there existed its equivalent 


THE GREAT COLLAPSE 


27 


in property. They fought the Commission on a 
legal technicality. 

The court’s decision has carried with it millions 
of dollars to the promoters and bankers, excessive 
fares, poor service to the public, and probably low 
wages to the railway employees. 

The outstanding fact is that these companies 
now pleading financial embarrassment, threatening 
bankruptcy, appealing to our sympathies in their 
efforts to secure permission to charge higher fares, 
deliberately chose to avail themselves of a legal 
technicality when it suited their purpose to do so. 
They reorganized the bankrupt business in a man¬ 
ner clearly carrying within itself the germs of fu¬ 
ture bankruptcy. It was not done out of igno¬ 
rance; it was done to make money. It paid to 
cast sound business principles to the wind and 
choose the path of speculation. 

The Commission argued not only in the New 
York Railways Company case, but also in the 
case of the Third Avenue Railway Company, 
that the companies could not succeed, for they 
were loading the business more than the traffic 
could bear. The organizers responded: “You 
have no legal right to say that.’’ They did not 
claim: “You are not correct in your contention.** 


28 


THE GREAT COLLAPSE 


And now, with the echoes of the Commission’s 
warning still ringing in our ears, these corporations 
impudently use the club of bankruptcy over the 
public to exact permission to charge higher fares. 
The impudence of the corporations is measured 
only by the tolerance of the public. 


Chapter II 

THE CORPORATION 

AS INSTRUMENT OF BUSINESS ORGANIZATION 
AND CONCEALER OF PROFITS 

A corporation is an excellent instrument for 
concealing the true earnings of capital. The aver¬ 
age man is not familiar with the intricacies of 
modern business organization. He loses himself 
in the maze of technical words. Common stock, 
preferred stock, cumulative bonds, adjustment 
bonds, are all so many mysteries to him. And 
it is precisely here where the corporations pre¬ 
vail over the public. 

A financial statement issued by a traction com¬ 
pany, for example, will show conclusively that it 
is losing money or that it is just “breaking even.” 
The public wonders how such a thing is possible 
in a city where the cars are nearly always filled 
to capacity, and in busy hours jammed beyond 
human endurance. But figures are figures; figures 
do not lie, although, it is said, liars do figure. 

The proof is “conclusive,” yet unbelievable. 
Out of the mist of doubt arise vague and indefinite 
ideas. In due time, by a constant presentation of 


29 


30 


THE GREAT COLLAPSE 


v 

the “proof,” the human mind begins to question. 

After all, why should these companies be 
singled out for ill treatment? Why victimize 
them? Why should the investors be compelled to 
lose money on the public? Everybody is compen¬ 
sated for services rendered—why not the railroad 
companies? Transportation is most essential; and 
if the figures show, and they do show, that a five- 
cent fare does not cover expenses, then there is 
nothing left to do but to raise the fares. Such is 
the reasoning of the average person. The question 
of fair play does enter into his calculations. 

The conservative citizen sees in this situation 
more than that. He sees in it a justification for 
his preconceived prejudice against collective owner¬ 
ship of industry generally and municipal owner¬ 
ship of railroads in particular. Had the city 
owned the transit system, he reasons, we would 
have had a 7 or 8 cent fare long ago. In fact, the 
companies in their campaign literature for higher 
fares make precisely this argument. He is sure 
that with a five-cent fare the city would either 
go bankrupt, or burden the taxpayers with the 
losses. In either case, it would be worse than 
what we now have, and he is happy there is no 
municipal ownership. Moreover, he is convinced, 


THE GREAT COLLAPSE 


31 


now more than ever, that there never should be 
municipal ownership. 

These conclusions are logical deductions based 
on information furnished by the companies. The 
information is calculated to lead to just such con¬ 
clusions. Those who furnish it know what they 
are doing. 

Nothing, however, could be further from the 
truth than these conclusions. The cold facts are 
that the roads are earning profits , big profits , even 
now under a five-cent fare , notwithstanding the 
financial statements of the companies to the con¬ 
trary. The trouble is that the figures in these fi¬ 
nancial reports are not properly examined. The 
actual is not separated from the alleged expense. 
Interest on bonds to this or that bank, dividends 
on preferred stock for this or that company, rentals 
on leases, amortization of bonds representing no 
actual investment in the business, are all thrown 
into expenses, although in reality they are pure 
profit. 

These “expenses,’* which run into tens of mil¬ 
lions of dollars annually, amount to almost half 
of the total expense as shown in the Annual Re¬ 
port of the Interborough Rapid Transit Company 
for the year ended June 30, 1918. The same 


32 


THE GREAT COLLAPSE 


financial condition is true of the other transit com¬ 
panies in the city. Yet these “expenses” represent 
nothing but fat profits. 

In its early days capitalism was simple enough. 
The game was an open one. Everybody com¬ 
prehended its rules. Shrewd lawyers were not 
needed at every step. Expert brokers were use¬ 
less. When individual proprietorships and simple 
partnerships prevailed it was easy to calculate 
the profits earned. 

If a business with an investment of $10,000 at 
the end of the fiscal year, having paid and de¬ 
ducted all expenses, had $700 left, it was clear 
to all that a 7 per cent, profit had been earned; 
if $1,400 were left, a 14 per cent, profit. There 
was no difficulty in finding out whether the busi¬ 
ness paid. 

Not so with a corporation. Ten thousand 
dollars’ actual investment in a corporation may 
have had issued against it $ 10,000 worth of com¬ 
mon stock, $10,000 of preferred stock and 
$20,000 worth of bonds. Whatever profits a 
corporation earns must be apportioned to the bond¬ 
holders first, the preferred stockholders next and, 
if there is any money left, to the holders of com- 


THE GREAT COLLAPSE 


33 


mon stock. If the corporation in question at the 
end of a fiscal year, with expenses deducted, finds 
$1,400 made, and if the interest on the bonds, 
which are generally fixed, happens to be 7 per 
cent., the $1,400 would be used to pay interest 
to the bondholders. The stockholders of both 
classes would receive nothing. No dividends to 
anybody, yet a 14 per cent, profit would have 
been made on the money invested. 

How easy it would be for the corporations to 
plead poverty before a gullible public! They 
could show black on white that they were oper¬ 
ating at a loss. 

The instance here cited is by no means far¬ 
fetched or overstated; on the contrary, it is the 
corporation method of concealing profits in its 
simplest and most innocent form. In practice the 
manipulation is far more subtle. Losses are fre¬ 
quently shown on financial reports when, in fact, 
profits are earned on the money invested. 

Properly to understand the claims of our public 
utility corporations and to know how much we are 
gouged, it will be necessary to make a simple and 
succinct statement of the meaning of the modern 
instrument of business organization, the corpora¬ 
tion. It will also be essential to unravel the hope- 


34 


THE GREAT COLLAPSE 


less and confusing situation of leases, partial con¬ 
trol, full control, operating agreements and hold¬ 
ing companies. The knots in our railroad sys¬ 
tem will be untied so that the length of the rope 
may be seen by all. 

It is difficult to define a corporation to include 
all elements. “According to contemporary prac¬ 
tice, a corporation is an association of natural 
persons, or of other legally constituted persons 
(other companies), authorized by law to act as a 
unit, under a corporate name, for the accomplish¬ 
ment of certain definite and prescribed purposes. 
. . . It is a ‘p erson ’ constituted by a law, separate 
and distinct from its stockholders, and, in a cer¬ 
tain sense, is a citizen.”* 

A corporation is an association of individuals 
recognized by law as an entity. It has an ex¬ 
istence of its own; it bears its own name, builds 
its own reputation, leads its own life; it is a 
“person,” a creature of the law; it can become 
insolvent, it can die, it can become revived; it 
can do many questionable things without in the 
least hurting or embarrassing those respectable 
members of the community who constitute it. 

* W. Allen, Modern Business Corporation, p. 1. 





THE GREAT COLLAPSE 


35 


The value of the property of a corporation is rep- 
repsented by what is known as stock. It is divided 
into shares, usually, of one hundred dollars each. 
A share is a certificate showing ownership in the 
corporation. A holder of a one hundred dollar 
share does not own one hundred dollars’ worth 
of property in the business. He does own 
one hundred dollars* worth of control in the cor¬ 
poration. A citizen of the United States does 
not, by virtue of his citizenship, own any part of 
the United States, but does own a right in the 
government of the country. A stockholder, like¬ 
wise, owns a right in the government of the cor¬ 
poration which owns the property. 

Stock is generally divided into two classes, pre¬ 
ferred and common. That class of stock earning 
dividends before any other, having priority in the 
assets of the corporation in case of failure, is 
called preferred stock. The stock that lays last 
claim on the assets in case of failure and earns 
dividends after all other claims have been satisfied, 
including the payment of dividends on preferred 
stock, is called common stock. 

The control of the corporation is usually in 
the reverse order. The common stock gets first 


36 


THE GREAT COLLAPSE 


control; preferred stock next, and under certain 
contingencies, bondholders may step in. 

A corporation may issue bonds to obtain 
finances. They are usually secured by a mort¬ 
gage on the property. Railroad corporations in 
this state must obtain permission from the Public 
Service Commission before issuing bonds. 

A bond is a certificate of indebtedness bearing 
a fixed and guaranteed interest which must be 
paid periodically. In case of inability to pay such 
interest, the court, upon the application of the 
bondholders, declares the corporation insolvent, 
takes the management away from the stockhold¬ 
ers and places the business in the hands of a re¬ 
ceiver to run it in the interest of the bondholders. 

The bondholders stand no risk. Their earn¬ 
ings are definite. The lords of high finance refuse 
to take chances. They will let the small fry 
run the business, pride themselves on owning 
things, give an opportunity to professors to write 
books attempting to disprove the theory of con¬ 
centration of wealth—they will permit all this, 
but they will never allow anything to interfere 
with their sapping the vitality of industry by draw¬ 
ing usurious interest, nor will they permit industry 


THE GREAT COLLAPSE 


37 


to escape their control. Most of the railroad com¬ 
panies are financed by bond issues. 

The courts describe corporations as being 
“soulless.” A glance at the history of our public 
utility corporations will convince one that the 
courts are right. 

The law, creating a new substance in a corpo¬ 
ration, apes nature. Chemical substances are gen¬ 
erally distinct from their elements. Water is not 
a sum of hydrogen and oxygen, it is their product. 
It is not a gas but a liquid. A corporation, like¬ 
wise, is not the sum of so many individuals, but a 
product of them. Three men A, B and C form 
a partnership, the result is a business of A + B + 
C. Each partner is responsible for the entire firm. 
If A is a prince and B and C are paupers, A 
will be held responsible for the business transac¬ 
tions entered into by B and C on behalf of the 
partnerships. The credit and value of the firm 
is the sum of the three partners. Each partner 
stakes his personal reputation and fortune in the 
business. 

If, however, A, B and C form a corporation, 
the result is a business of A B C, a new creature. 
Each member risks an amount equal to the par 


38 


THE GREAT COLLAPSE 


value of the stock he owns, beyond which the 
creditors cannot reach him. The business is car¬ 
ried on by a Board of Directors elected by the 
stockholders. 

Those who oppose socialism because it would 
destroy “individual initiative” and “incentive” to 
personal effort, thereby destroying the “founda¬ 
tion of modern society,” must revise their views. 
The corporation, the chosen instrument of capi¬ 
talism, has already destroyed individual initiative 
and incentive to personal effort. A corporation is 
impersonal; it is an institution, a collectivity, le¬ 
gally possesing some attributes of a natural per¬ 
son carrying on its business activities through 
hired brains. Where personal service is of the 
essence a corporation cannot function. Thus, the 
law in New York forbids dentists, physicians and 
lawyers to carry on business as a corporate body. 

A corporation is essentially a modern instru¬ 
ment of business organization. Prior to 1776 
only two business corporations had been chartered 
in this country. 

The first quarter of the nineteenth century was 
the beginning o c the present industrial system. 


THE GREAT COLLAPSE 


39 


Capitalism was in its youth. It was vigorous, 
enterprising, almost feverish in its growth. Then 
corporations were given the greatest stimulus. 
Many of the states, by enacting favorable statutes, 
facilitated the organization of corporations. With 
practically no legal check, the corporation in its 
adolescent stages indulged in unspeakable vices. 
It resorted to every trick known to the business 
charlatan. 

“It was asserted that a small clique of Boston 
capitalists by improper methods perpetuated vot¬ 
ing control of those corporations in which they 
owned a comparatively small amount of stock. 
They induced stockholders to sign proxies in their 
favor v/hen they signed their dividend receipts. 
They also held annual meetings, in small rooms, 
to which but a fraction of the shareholders could 
get access, and called meetings of several com¬ 
panies at different places for the same day and 
hour, in order to divide the oposition of inde¬ 
pendent men who owned stock in a number of 
companies. Less than a score of Boston capital¬ 
ists were said thus to dictate the fortunes of most 
of the great manufacturing corporations of the 
State, and one man was cited who was director 
of 23 companies and president of all. The same 


40 


THE GREAT COLLAPSE 


coterie owned a Massachusetts Life-Insurance 
Company, which, with a capital of $500,000, 
controlled nearly 10 times that amount of invest¬ 
ment funds. Having forced factories by misman¬ 
agement to accept loans by this company, they 
either foreclosed or used every power to depress 
stock for their own benefit. The other spoil of 
this control was high-salaried officers and exhor- 
bitant agents’ commissions.”* 

A similar story of early abuses might be told 
with equal truth of New York traction companies. 
Many evil practices exist even now, but such as 
are pictured above are too crude for the modern 
financiers. They can stifle opposition and obtain 
control in a more “respectable” and “legal” way. 
The modern is the scientific method of robbery. 

The fact that the corporation can be used as 
an instrument for corruption did not deter indus¬ 
try from selecting it as the most logical and adapt¬ 
able instrument of business organization. Be¬ 
tween individual proprietorships, partnerships and 
corporations there was a fierce struggle for ex¬ 
istence, and the corporations won. Almost three- 

* History of Manufacturers, 1607-1860, p. 460; quoted 
in Modem Business, C. W. Gerstenberg, p. 9. 



THE GREAT COLLAPSE 


41 


quarters of the wage earners of this land are em¬ 
ployed in corporate industry. The basic industries 
of the country are almost all in the hands of 
corporations. 

What is the real reason for the conquest of 
the corporation over the individual proprietorship? 
What is the efficient cause, as it were, for the 
selection of the corporate mode of business organ¬ 
ization? Why do business men deliberately 
choose this instrument as against all others? 
While undoubtedly the vicious element in the 
business world will at times prefer the corporate 
method because of the opportunities it offers for 
corrupt practices, the vast majority of business 
men do it purely because of its superiority over 
all other modes of organization. Any agency can 
be abused and its purposes perverted. 

Modern industry, especially the railroad busi¬ 
ness, required three indispensable elements: per¬ 
manency, large size and limitation of risk. The 
corporate method assures all these. 

Permanency is essential in the railroad business. 
It would be difficult to confer a franchise right 
upon an individual or partnership, because the en¬ 
terprise would be dependent upon the skill or lack 
of skill, ability or inability, whims, fancies, and 


**,V r ‘*smw: 


42 77 /£ GREAT COLLAPSE 

the life of human beings. Upon the death of an 
owner or a partner in whom, principally, trust and 
reliance was placed, the business may descend by 
inheritance or otherwise to individuals incompe¬ 
tent and untrustworthy. Evidently, such possi¬ 
bilities and unstable conditions are impossible in a 
business where permanent fixtures are built at great 
expense and put to stay. The initial expense of a 
railroad is very large and is growing larger daily. 
A railroad cannot be moved about, or otherwise 
subjected to disturbances. The life of the busi¬ 
ness cannot be measured by and should not de¬ 
pend upon the life of a human being. 

A corporation, on the other hand, is not sub¬ 
ject to the whims and fancies of stockholders. It 
is run in accordance with certain prescribed laws. 
The death of an investor does not in the least 
affect the progress or life of the corporation. If 
a stockholder cannot agree with the rest of the 
investors the corporation is not dissolved, he sim¬ 
ply sells his shares to someone else. The business 
does not suffer thereby. Order, permanency, are 
the law of the modern business world. 

Of course, under certain circumstances, a cor¬ 
poration, too, can be dissolved; but its dissolu¬ 
tion is a rare thing. It is accomplished either 


THE GREAT COLLAPSE 


43 


when it violates the purpose for which it was or¬ 
ganized, and the state finds it necessary to inter¬ 
fere, or, on the decision of two-thirds of its 
stockholders. 

This is the age of big business. Even those who 
rail against “monopolies” and “trusts” concede 
that. President Wilson, in a masterly brief for the 
middle class, said: “I am for big business, but 
against monopoly.”* Any instrument of business 
organization that does not permit the assembling of 
large sums of capital, the conducting of business 
on a grand scale and the elimination of the tre¬ 
mendous economic waste due to a certain kind of 
competition, is doomed to go. A railroad is, in its 
very nature, a “big business.” At the beginning, 
when large individual fortunes were rare, few 
railroads indeed would have been built if there 
were no way of getting together comparatively 
small investors to cooperate, raise a large amount 
of capital, commensurate with the undertaking. 
For that purpose any other agency save a corpo¬ 
ration would have been cumbersome and ill- 
adapted. A corporation can draw capital from 
tens of thousands of investors, assemble large sums 


The New Freedom, p. 180. 



44 


THE GREAT COLLAPSE 


of money, engage in business on the grandest scale 
with the same efficiency and economy as if it con¬ 
sisted of the fewest number of investors permitted 
by law. 

The limitation of risk is an essential ingredient 
of modern business organization. The risk to be 
discussed here is not the relative risk of corporation 
investors usually the theme of much controversy. 
It is to be understood here in a different sense. 

The capitalist saw long ago the inadvisability 
of staking his entire fortune in one establishment. 
Business everywhere was so alluring that he 
yearned to have his finger in more pies than one. 
If he did not make out well in one enterprise he 
made up for it in another. Moreover, it gave the 
financier, the banker, an opportunity to take a 
hand in every business that could be manipulated 
to his own advantage. A controlling share in the 
business was all he needed, the rest might be dis¬ 
tributed among thousands of small fry, for all he 
cared. Under individual proprietorship or part¬ 
nership such practices would have been impossible. 
A failure in one partnership, the inability of the 
defunct business to meet all debts might mean the 
ruin of the rich partner. His investments in other 


THE GREAT COLLAPSE 


45 


business would not be immune from the claims of 
creditors. In a corporation, in case of failure, he 
is safe as far as his other investments are con¬ 
cerned. Capital must be free to move, invest itself 
all over the country, in all kinds of industry, in all 
parts of the world. Antiquated modes of business 
organization must not impede its mobility. En¬ 
cumbrances and risks must be at a minimum. 

Industry realized its needs and acted accord¬ 
ingly. If the corporate method is best suited to 
its development, it is selected as the prevailing 
mode of organization. It is the old principle of 
the survival of the fittest. There is no moralizing 
about it. The question of good or bad does not 
enter into the discussion at all. The corporation 
was most adaptable to the needs of the railroad 
business and it prevailed. To attack and rail 
against the “corporation,” and consider it an evil 
in itself is folly; to understand it intelligently is 
important. 


Chapter III 
THE COMBINATION 


If the first quarter of the nineteenth century is 
marked by the introduction of the corporate form 
of business organization, the last quarter of the 
century saw the birth of the trust, the syndicate, 
the pool, the holding company, the consolidation, 
the merger, the “agreements,” the deals and pri¬ 
vate understandings of all kinds. Industry was 
unable longer to contain itself within the bounda¬ 
ries of the ordinary corporation. It sought to en¬ 
large its business frontiers. 

Rapid improvement in machinery gave rise to 
new instruments of transportation. New instru¬ 
ments of transportation and vastly improved con¬ 
ditions of travel facilitated communication. The 
phenomenal growth of industry and commerce 
have been both the effect and the cause of im¬ 
proved transportation. 

Motive power has gone through several stages 
in development. While the advent of each succes¬ 
sive power has meant greater efficiency, economy 
and speed, its introduction has been marked by 
many difficulties and much expense. The modest 
expenditures needed for the construction and 


46 


THE GREAT COLLAPSE 


47 


equipment of a short-distance street railway is no 
longer sufficient. This is the age of Rapid Transit 
systems, steel cars, elaborate stations and gigantic 
power-houses. The initial expense for the con¬ 
struction of modern elevated and subway lines 
runs into hundreds of millions of dollars. Compe¬ 
tition in a business requiring such great initial ex¬ 
penses is an absurdity. Combinations took root 
very rapidly. 

During the great anti-trust wave which swept 
the country in the first decade of the twentieth 
century, the railroad business seemed to enjoy a 
quiet privilege. Politicians, legislators and jour¬ 
nalists, trading on their anti-monopoly attitude, 
realized, less clearly at first but more and more 
so as the years rolled by, that the railroad busi¬ 
ness is in its very nature a monopoly. It has 
thereby been exempted from the general stigma 
attached to the industrial combination. 

Railroads are distinct from most other business 
by reason of their public character. From the very 
beginning the railroad has been considered a public 
convenience. The right to engage in the railroad 
business requires more than the mere formal sanc¬ 
tion of authority which corporations secure when 
about to engage in an ordinary industrial pursuit. 


48 


THE GREAT COLLAPSE 


Whichever the railroad is to be, surface, elevated 
or subway, the company must get a special permit, 
known as a franchise. A street, a public thor¬ 
oughfare is the result of a slow process of devel¬ 
opment and of the expense of much time, labor 
and money. The whole community contributes to 
its growth; the public thoroughfare is, therefore, 
the property of the whole community, a valuable 
property at that. To disfigure the street by laying 
rails on its surface, or to erect an elevated struc¬ 
ture with its innumerable inconveniences, or to 
build a subway with its threatening danger to 
property and the necessary replacement of and in¬ 
terference with the various underground pipes and 
mains obviously requires special permission from 
the community. The considerations for these 
special rights and privileges and the methods the 
companies have employed in obtaining them will 
be discussed in chapter VII. 

The outstanding fact is that once a franchise is 
granted to one company, for that particular route 
it has a practical monopoly. Moreover, if it is an 
important route, the numerous side routes and ex¬ 
tensions are very often valuable only to that par¬ 
ticular company. Some lines crossing sparsely 
populated sections are run at a small profit, at cost, 


THE GREAT COLLAPSE 


49 


or even at a slight loss by a company that has a 
transportation system in the heart of the city. It 
uses these lines as feeders. Only by taking the 
system as a whole do the lines become profitable 
enterprises. For other companies, each to run one 
of these lines independently would be suicidal. 
They would soon find themselves in the hands of 
receivers. Competition, on this score alone, is 
impossible. 

And yet, there was competition or an attempt 
at competition in the early days of railroad devel¬ 
opment. So far as can be learned, the competition 
centered not so much in keeping rates down or in 
giving better service to the public, as in grabbing 
franchises. 

The railroads learned the lesson of competi¬ 
tion at a considerable price. The usual conditions 
prevailed. More companies were organized than 
could be profitably sustained. While on the sur¬ 
face things looked quiet and regular, underneath 
there raged a fierce struggle for existence. The 
companies possessing greater advantages in the 
struggle succeeded in crushing the weaker ones. 

Of the amazingly large number of companies 
that were organized within the present limits of 
New York City to operate routes very few have 


50 


THE GREAT COLLAPSE 


remained alive and are doing business. And even 
the few apparently independent operating com¬ 
panies are controlled, in the final analysis, by a 
small group of financiers. 

Darwin calculated that if one pair of elephants, 
the slowest breeders among mammals, were per¬ 
mitted to propagate their kind for 750 years, and 
if all the offspring lived and bred they would be 
the ancestors of nineteen million elephants. Luck¬ 
ily the struggle for existence kills a sufficient num¬ 
ber of elephants to leave a little space in this world 
for the rest of us. So it is with the railroad com¬ 
panies. There have been so many of them or¬ 
ganized in the short space of less than a century 
that, had they all lived and funcitoned we would 
now have a company for every 100 feet or so of 
railway. A ride in New York, such as we get 
now for five cents, would have been exceedingly 
expensive and fearfully annoying. Thanks to in¬ 
dustrial progress we have been spared that agony. 

Up to July I, 1913, seven hundred and twen¬ 
ty-six corporations had been organized to operate 
routes in what is now New York City. More 
than two-thirds of these died, too weak to put up 
a fight, yielding to the inevitable without resist¬ 
ance. The 271 remaining companies struggled 


THE GREAT COLLAPSE 


51 


hard. They fought to survive, to be successful. 
After several years of warfare the battlegrounds, 
when cleared, found only 76 companies alive. 
1 he casualties were enormous, 195 out of 271 lost 
their identity. They were merged or foreclosed. 
Even the heroic 76 companies were not permitted 
to have the field all to themselves. Thirty-one of 
them chose to maintain a nominal existence only, 
leasing their properties to the remaining forty-five. 
These forty-five companies are further combined 
by means of the holding company. The few 
holding companies are, in turn, very effectually 
controlled by a small clique of financiers, trust 
companies, investing banks and insurance com¬ 
panies. The process of merging, consolidating 
and concentrating of control was phenomenal. 
There is a complete monopoly in the transit sys¬ 
tem of New York. 

The “independent” holding companies entered 
into private agreements and understandings by 
which the city became completely helpless and 
entirely at their mercy. They divided the city 
into “spheres of influence,” in which each com¬ 
bination is to reign supreme. They are doing on 
a small scale what financial imperialism does on a 
large scale. 


52 


THE GREAT COLLAPSE 


How are these nefarious activities accom¬ 
plished? How does this bear on the question of 
raising fares, and the entire tranction problem? Is 
it a product of our policy of ignorant indifference? 
If so, what should our policy be? 

All these questions will be taken up in detail 
to indicate the modus operatidi of the concentra¬ 
tion of control of the traction business and its con¬ 
sequent deep-rooted evils to the community. We 
will explain briefly the “holy alliance** of finan¬ 
cial monarchs, the intercorporate method of doing 
business. 


Chapter IV 


THE HOLY ALLIANCE 

Intercorporate relations is a practice well 
known in the business world. It is a device by 
which common control is established. Separate 
companies are organized, but are all managed by 
the same directors. Separate corporations are 
maintained in spite of the duplicate expenses and 
obvious economic disadvantages because of the 
opportunities they offer for obtaining certain 
“rights’* which may be permissible in law, but 
surely wrong in equity. 

A glaring instance of such an arrangement de¬ 
signed to defraud the city was detected as far 
back as 1886. The Bleecker Street and Fulton 
Ferry Railroad Company and the Twenty-third 
Street Railroad Company were separate corpo¬ 
rations, each having a franchise to operate a 
railway on a different route. The franchises were 
very valuable, and the Board of Aldermen, cor¬ 
rupt as that body was, did not dare to give them 
away entirely free. Agreements were made be¬ 
tween the city and each of the companies whereby 
the city would be compensated for the franchises. 


53 


54 


THE GREAT COLLAPSE 


The Bleecker Street and Fulton Ferry Rail¬ 
road Company was required to pay 1 per cent, of 
its gross receipts annually, while the 23rd Street 
R. R. Company paid a lump sum. By an agree¬ 
ment between the two companies to use certain 
tracks jointly the receipts were so mixed as to 
make it impossible to collect the assessments from 
the Bleecker Street and Fulton Ferry R. R. Com¬ 
pany. In that way the city has been defrauded 
of tremendous sums of money annually. 

The activities of a certain Jacob Sharp, of very 
shady connections, to obtain an additional fran¬ 
chise on the same terms as the above companies 
impelled the Mayor, who was in a row with the 
Board of Aldermen, to investigate the composi¬ 
tion of the corporations. He found the same 
crowd controlling both companies by intercorpo¬ 
rate directorates.* 

Bleecker Street & Ful¬ 
ton Ferry R. R. Co. 23rd St. R. R. Co. 

Pres. Jacob Sharp Pres. Jacob Sharp 
Sec. Thos. H. McLean Sec. Thos. H. McLean 
Treas. David J. King Treas. Lewis May 


Meyer’s History of Franchises in N. Y., p. 142 . 



THE GREAT COLLAPSE 


55 


DIRECTORS 

J. Sharp 
Lewis May 
Eugene S. Ballin 
Isaak Hendrict 
David James King 
John Downey 
Henderson Moore 
S. B. H. Vance 
Thomas B. Rerr 
Joseph Jacobs 
John H. Selmes 
Alex. E. Kursheidt 
William Mangris 


DIRECTORS 

J. Sharp 
Lewis S. Ballin 
Eugene S. Ballin 
Isaak Hendrict 
David James King 
John Downey 
Henderson Moore 
S. B. H. Vance 
L. Marx 

Lazarus Rosenfeld 
James Lynch 
John R. Flanagan 
James Flanagan 


Thus, two corporations, distinct in law were 
practically the same in fact. They were both 
steered and directed by the same hand. 

Holy alliances between corporations, under 
more forms than one, exist with us to-day on a 
larger scale than ever and with more injurious 
effect. 

When the appearance of independence no 
longer serves a “good” purpose, or when it is 
necessary to take some small and ill-reputed com¬ 
pany under the protective wings of a larger cor- 


56 


THE GREAT COLLAPSE 


poration having back of it some great financier 
to enhance its credit, the companies fuse and as¬ 
sume the name of the favpred corporation. Such 
a consolidation is called merger. 

In the famous Metropolitan Street Railway 
Company merger, in 1895, the constituent mem¬ 
bers gave up their individuality. They gave up 
their names, their existence, and assumed a new 
name. The shareholders of the constituent dead 
members received shares from the new company, 
equivalent in amount to their previous holdings. 
Of course, the position of the creditors of the con¬ 
stituent companies was precisely the same as be¬ 
fore the merger. It is a well-established principle 
in law that nothing the debtor will do can impair 
the rights of his creditors in law or in equity. The 
claim of the creditors is against the new corpora¬ 
tion. It is, therefore, obvious that if the separate 
companies were mismanaged, wasteful and reck¬ 
less in their financial dealings, and if they mort¬ 
gaged their properties at a great price, and if they 
saddled the business with various bonded indebt¬ 
edness bearing high rates of interest, the merger 
would not do away with these evils, for it as¬ 
sumes all the obligations of its members. It re¬ 
tains all the weaknesses of its constituent mem- 


THE GREAT COLLAPSE 


57 


bers; it does not establish the business on a solid 
financial basis. 

The Metropolitan was just such a merger and, 
therefore, could not endure long. On November 
19, 1907, a receiver was appointed to take charge 
of the properties. 

The process of consolidation by merger became 
widespread. No fewer than 11 7 companies, or¬ 
ganized to operate routes in New York, gave up 
their existence in merger. 

The apparently innocuous trackage agreements 
and contracts for supplies and equipment are 
crowded with possibilities for fraud under inter¬ 
corporate relations. It must be remembered 
always that the railroad companies are subject 
to regulation more or less, even if it be only the 
regulation of public opinion. Earnings must ap¬ 
pear small, particularly so when employees de¬ 
mand higher wages, or when the public demands 
a reduction of fares, an extension of transfers, or 
when the companies demand an increase in fares. 

Where intercorporate directorates exist track¬ 
age agreements, equipment contracts, leases—all 
offer a splendid opportunity for diverting profits 
into another company owned by the same crowd, 
as a “consideration” for certain “rights,” supplies 


58 


THE GREAT COLLAPSE 


received, etc. In this way the expense of the 
company subject to regulation is bolstered up 
considerably. Then it is easy to plead poverty; 
more than that, prove it by “financial statements.*’ 

The Nassau Electric Railway Company, 
which absorbed 18 distinct railroad corporations 
by merger and controls many by leases, furnishes 
a classic example of manipulation designed to rob 
the public. On the surface there appears nothing 
wrong. Scratch the surface and the foul frauds 
become evident. 

It should be noted that this company is com¬ 
pletely controlled through stock ownership by the 
Brooklyn Rapid Transit Company. This control 
dates back to February 15, 1899. 

The company owns power houses in various 
parts of New York and Brooklyn. 

On February 28, 1907, the company leased 
its power houses to a corporation known as the 
Transit Development Company. On the same 
day its sister companies, all controlled by the 
Brooklyn Rapid Transit Company, joined it in 
leasing to the Transit Development Company 
their power houses and plants. 

The Transit Development Company entered 
into an agreement with the companies of the 


THE GREAT COLLAPSE 


59 


B. R. T. system whereby “the Development 
Company would take over and engage the em¬ 
ployees and officers employed in these plants in 
connection with their operation, also to furnish all 
necessary labor and material for the maintenance 
and construction of track, sub and super struc¬ 
tures, poles, wires and buildings, etc., as required 
by the several railroads companies, parties to this 
agreement.”* 

Tire same day the leases w r ere made the De¬ 
velopment Company entered into an agreement 
with its “landlords” to supply electrical pow r er 
for the operation of their cars at the cost thereof, 
plus 5 per cent. This contract is commonly 
known as the “Powder Consumption Contract.” 

The companies of the B. R. T. system w r ere 
operating cars across the Brooklyn Bridge. Some 
time in 1907 they decided they wanted cars of 
a select type for local bridge service. On De¬ 
cember 23, 1907, they entered into an agreement 
with their tenant, the Transit Development Com¬ 
pany, to supply them with such cars and main¬ 
tain them at operating efficiency, in consideration 
of which, the Development Company w r ould re- 

* Documentary History of Railroads, P. S. C. Reports 
for 1913, v. 5, p. 740. 



60 


THE GREAT COLLAPSE 


ceive all costs , plus 10 per cent. Who is this 
fortunate Development Company? Why does it 
receive such fat contracts with guaranteed liberal 
profits? Is it in any way related to the B. R. T. 
Company? 

The Transit Development Company is a cor¬ 
poration organized on April 22, 1902, for the 
following purposes: 

“1. To purchase or otherwise acquire and 
hold, improve, operate, lease, rent, sell, grant and 
convey or exchange real property. . . . 

“2. To carry on the business of general con¬ 
tractors, including the contracting with other cor¬ 
porations or persons for the supply of power or 
for the construction, equipment of railroads, 
bridges, wharfs, tunnels and subways, and carry 
out such contracts.”* 

The capital stock was to be $25,000 issued 
in one hundred dollar shares. From the minutes 
of a special meeting held by the company on 
October 14, 1902 at its offices at 168 Montague 
Street, Brooklyn, it appears that the B. R. T. 
Company is the sole owner of all of its capital, 
and, therefore, of the corporation itself. The 


* From incorporation certificate. 



THE GREAT COLLAPSE 


61 


affidavit attached to the minutes reads: ‘7 here¬ 

by certify that the Brooklyn Rapid Transit Com- 
pany is the holder of all the capital stock of Tran¬ 
sit Development Company, and so appears on the 
books. . 

The affidavit is signed by C. D. Meneley, sec¬ 
retary of Transit Development Company. Mr. 
Meneley is now the vice-president, member of 
the board and treasurer of the Brooklyn Rapid 
Transit Company. 

Another affidavit attached to the minutes 
reads: “T. S. Williams, being duly sworn, says: 
That he is one of the directors of Transit Devel¬ 
opment Company and was present at a special 
meeting of the stockholders of the said 
company. . .” 

Mr. Williams, up to the collapse, was the pres¬ 
ident, and at the time of the special meeting was 
the vice-president of the Brooklyn Rapid Transit 
Company. 

The minutes are exceedingly absurd. The par¬ 
ticipants in the meeting go through the legal mo¬ 
tions in real mock—serious fashion. Mr. Williams, 
as vice-president of the B. R. T. Company, the 
sole stockholder, pompously resolves that, “we, the 
undersigned, being all the stockholders of Transit 


62 


THE GREAT COLLAPSE 


Development Company, together owning the en¬ 
tire capital stock of said company ... do here¬ 
by authorize the directors of said company to 
hold ...” a special meeting and do certain 
things. Whereupon, Mr. Williams, as director, 
in pursuance to instructions of Mr. Williams, “the 
stockholders” acts with extraordinary dispatch. 

“On a motion, duly seconded, a vote was 
taken upon” a proposed resolution. “There¬ 
upon, stockholders representing two hundred and 
fifty (250) shares of stock, being all of the capi¬ 
tal stock of the said corporation, vote in favor of 
such resolution and no stockholders voted against 
this adoption, and thereupon such resolution was 
declared duly adopted and the meeting ad¬ 
journed.” 

Mr. Williams acted the various roles in true 
Pooh-Bah style. All the stockholders were of 
“one mind” and therefore were unanimous in 
their decisions. 


Chapter V 
THE LEASE 

Another instrument which has gained a foothold 
in our railroad system is the lease. It is an ar¬ 
rangement whereby one corporation transfers the 
right to possession and use of its properties to an¬ 
other corporation. It differs from a sale in that 
the title to the property remains with the original 
owner. The owner of the property is called 
lessor, landlord; the user of the property is called 
lessee, tenant. Under the lease the well-known 
relations of landlord and tenant exist. 

There are many reasons why railroad com¬ 
panies prefer the lease instead of the sale, particu¬ 
larly when the landlord and tenant are the same 
party; and if traced back far enough they are usu¬ 
ally found to be the same. In the case of a sale, 
if it is genuine, the purchaser scrutinizes carefully 
the value of the property. He does not volun¬ 
tarily pay for watered stock. He does not assume 
heavy bonded indebtedness. He takes a physical 
valuation of the road and pays what competent 
appraisers in his employ tell him to pay. If the 
sale is not genuine, some such procedure would 
have to be followed if only to keep up appear- 


63 


64 


THE GREAT COLLAPSE 


arxes; otherwise, the purchase would be a fraud 
too plain to be concealed. The consideration in 
a sale is a lump sum. 

The lease is different. The consideration for 
a lease is usually in installment sums, in rentals. 
The lessee takes over the roads as they are, with 
all encumbrances and obligations. He pays an 
interest on the bonded indebtedness, taxes, sal¬ 
aries of officers and all expenses required by the 
lessor company. In addition, the tenant usually 
agrees to pay dividends to the landlord’s stock¬ 
holders. As a rule the dividends are fixed. 
They become part of the “expenses” of the oper¬ 
ating company. 

Thus, the Interborough Rapid Transit Com¬ 
pany, whose president is so vociferous in his de¬ 
mand for a higher fare, giving the poverty of the 
company as a reason, pays to its landlords, the 
Manhattan Railway Company, “guaranteed 
dividends—7 per cent, on Manhattan Railway 
Company capital stock,” amounting annually to 
the enormous sum of $4,200,000.* And yet 
the company claims it pays no dividends. Be¬ 
sides these guaranteed dividends the Interborough 
Rapid Transit Company pays: 


* Annual Report of the I. R. T. Co. for 1918, p. 5. 



THE GREAT COLLAPSE 


65 


^Interest on Manhattan Railway Con¬ 
solidated mortgage 4% bonds. . . .$1,627,360 
Interest on Manhattan Railway 2nd 

mortgage 4% bonds. 180,920 

Manhattan Railway (organization) . 35,000 


Total .$1,843,280 

The Manhattan Railway Company has an in¬ 
teresting history. Almost from its very birth, 
December 29, 1875, it struggled to overcome the 
opposition of two other companies, the New York 
Elevated Company and the Metropolitan Ele¬ 
vated Railroad Company. By various arrange¬ 
ments, litigations and schemes the Manhattan 
Railway Company absorbed the other two com¬ 
pletely. 

“January 1, 1903, this company leased its 
property and franchises to Interborough Rapid 
Transit Company, the lease to take effect from 
April 1, 1903, and to run for a period of 999 
years from November 1, 1875. The lease pro¬ 
vided for a nominal rent of $10,000 and guaran¬ 
teed to the stockholders on the Manhattan Com- 


* Annual Report of the I. R. T. Co. for 1918, p. 5. 






66 


THE GREAT COLLAPSE 


pany an amount equal in the aggregate to not 
exceed 7 per cent, on that company’s stock, and 
to be not less than 6 per cent, and, after January 
1, 1906, 7 per cent.; the Interborough to pay as 
rent also the interest of outstanding debenture 
bonds of the New York Elevated Railroad Com¬ 
pany to the amount of $ 1,000,000, also the in¬ 
terest on $10,818,000 first mortgage bonds on 
the Metropolitan Elevated Railroad Company, 
and on $28,065,000 consolidated mortgage 
bonds of the Manhattan Railway Company, 
and of all bonds to be issued; the lessee to 
pay all taxes and charges of a like nature.”* 

The Interborough pays the staggering sum of 
$6,000,000 annually, of which more than two- 
thirds is pure profit, the rest being interest to the 
Manhattan Company for 999 years. Capitalism 
takes a long lease unto itself, it figures without its 
host, the people. 

From April 1, 1903, to April 1, 1919, ac¬ 
cording to the lease, the Interborough has already 
paid to the Manhattan Company $67,200,000 in 
net profits, a sum many times the actual value of 
the roads. If the present disgraceful partnership 
between the city and the Interborough, of which 


* P. S. C. Reports, 1st Dist., 1913, v. 5, p. 664. 



THE GREAT COLLAPSE 


67 


more later, is allowed to run to the end, the public 
will be obliged to pay to the Manhattan Com¬ 
pany, through the Interborough, about $205,800,- 
000 in net profits. 

President Shonts complains his company is not 
able to pay dividends. Does he deliberately over¬ 
look $6,000,000 which go annually and, if he has 
it his way, will continue to go for 955 years 
longer to the Manhattan Company? When he 
speaks of dividends, does he not know that as far 
as the people are concerned, dividends paid un¬ 
der the name of “rentals” or any other name are 
dividends none the less? 

Another interesting case of manipulation by 
means of the lease is the Bridge Operating Com¬ 
pany. This company was organized May 21, 
1904, for the purpose of operating local cars on 
the surface tracks of Williamsburg Bridge at a 
fare of three cents for a single ticket and five cents 
for two trips. The company was organized by 
the B. R. T. Company and the New York City 
Railways Company. Its capital stock was to be 
$100,000 to be sold in 1,000 shares at $100 per 
share. 

The B. R. T. Company and the New York 


68 


THE GREAT COLLAPSE 


City Railways Company each agreed to take 500 
shares and pay for them in cash, at par. Other 
stipulations in the agreement seemed to show that 
the two companies were to be equal partners in 
this new corporation. 

June 21, 1907, the Bridge Operating Com¬ 
pany leased its properties to the Brooklyn Heights 
Railway Company and the New York City Rail¬ 
way Company, fn consideration for this the two 
“tenants” were to assume all obligations and 
duties of the “landlord” and guarantee six per 
cent, dividends to the landlord’s stockholders, 
which in this case are no other than the tenants 
themselves. 

By a “gentleman’s agreement” one of the ten¬ 
ants, the New York City Railway Company, left 
the operation of the leased properties to its part¬ 
ner for a consideration, of course. “It seems that 
actual operation of the Local Bridge service was 
at once assumed by the Brooklyn Heights Rail¬ 
road Company and has ever since that date been 
carried on exclusively by that company. By an 
exchange of letters it has apparently been agreed 
that the Brooklyn Heights Company shall receive 
$5,000 a year for general administration of the 


THE GREAT COLLAPSE 


69 


line and $2,500 a year for depot, storage and 
shop facilities. . . 

According to its annual report for 1918, the 
Brooklyn Rapid Transit Company is in complete 
control through stock ownership of the Brooklyn 
Heights Railway. 

For all practical purposes these transactions are 
reduced to this: The B. R. T. Company organ¬ 
izes a corporation, allows it to live an independent 
life for a little less than three years, in which 
time it is made to acquire certain valuable fran¬ 
chises, it is made to enter into contracts and agree¬ 
ments, then it is made to lease all “its” rights and 
possessions to the B. R. T. Company. As the 
Bridge Operating Company, the B. R. T. is a 
landlord receiving rent and a six per cent, guar¬ 
anteed dividend; as the Brooklyn Heights, the 
B. R. T. is a tenant cheerfully paying rent to its 
landlord. 

This absurd double role acted by one and the 
same company successfully to conceal profits may 
not have been tolerated in a less enlightened age, 
but in modern times it is perfectly good business. 
The accepted business ethics seems to be: If you 
get away with it, you are entitled to it. 


* P. S. C. Reports, 1st Dist., 1909, v. II, p. 130. 



70 


THE GREAT COLLAPSE 


The excessive rentals paid by the Brooklyn 
Rapid Transit Company are no mean contribution 
towards its insolvency. The reasons for the finan¬ 
cial “failure” are not to be sought in the low fares 
—for they are not low at all; in fact they are 
too high—but in obscure transactions, such as 
these leases present. To pay large dividends un¬ 
der the guise of rentals, and at the same time plead 
poverty, is little short of criminal fraud. But this 
is the very thing that is artfully practiced by the 
traction trust. 

The Brooklyn City Railroad Company, one of 
the “landlords” of the Brooklyn Rapid Transit 
Company, received annually as large a dividend 
as 10 per cent, upon its capital stock, not to ex¬ 
ceed $12,000,000, and interest on its bonded in¬ 
debtedness, not to exceed $6,925,000, all charges 
of maintenance, taxes, etc., besides. 

“May 14, 1893, the company leased its entire 
road to the Brooklyn Heights Railroad Company 
for 999 years from June 6, 1893, the date when 
the lease took effect. . . The lessee agreed to pay 
to the company an annual rental at the rate of 10 
per cent, per annum upon the outstanding capital 
stock of the company, not to exceed $12,000,000, 
and the interest on the bonded indebtedness of 


THE GREAT COLLAPSE 


71 


the company not to exceed $6,925,000. All 
charges for maintenance, taxes, etc., were to be 
paid by the lessee. The lessee agreed, moreover, 
not to reduce the fare charged on the road.”* 

Thus, it appears, the Brooklyn City Company 
has received annually in pure profits the sum of 
$1,200,000 since June 6, 1893, making a total up 
to date of $31,200,000. This is another case 
where the people have already paid in pure profit 
a sum sufficient to pay for the entire capital stock 
of the company more than two and a half times 
over and still the roads remain the property of the 
corporation with the right to draw $1,200,000 
annually for 973 years longer or, in the aggre¬ 
gate, the stupendous sum of $1,167,600,000! 

That it is absurd for a corporation capitalized 
at $12,000,000 to draw a guaranteed profit of 
$1,198,800,000 does not alter the fact that this 
is the lease , the sacred contract to which the peo¬ 
ple have already given sanction and reality by 
paying $31,200,000 without a protest. Whether 
they will continue to do so, by raising fares if nec¬ 
essary, depends wholly on how intelligently they 
understand the problem. 

It should be remembered that these guaran- 


* P. S. C. Reports, 1st Dist., 1913, v. 5, pp. 180-181. 



72 


THE GREAT COLLAPSE 


teed dividends are payments made in addition 
to all expenses and obligations of the “leased” 
property, no matter how much it has been swelled, 
and are to be deducted from the gross earnings 
of the lessor. These rentals are not listed in the 
financial statements as profits or dividends, but 
rather as fixed charges. Yet, what are these rent¬ 
als if not dividends in disguise? 

The abuses here cited, practiced by means of 
the lease , will furnish a bare glimpse of what is 
going on behind the curtains of our traction sys¬ 
tems. The extent of concealed profits made by 
these methods alone will become clear when it 
is realized that 31 companies in greater New 
York are operated under leases, the terms of which 
range between 99 and 999 years. The most im¬ 
portant of them are for periods of 999 years. 


Chapter VI 

THE HOLDING COMPANY 

Intimately connected with the lease is the hold - 
ing company. It is the latest form of combination. 
A holding company is a corporation having ex¬ 
clusive or part powers to purchase and hold stock 
of other corporations. By acquiring a majority 
interest in the stock of many corporations or an 
amount sufficient to give it a controlling interest, 
the holding company becomes the dictator of the 
policies, financial and otherwise, of its members. 
In that way, although maintaining nominal inde¬ 
pendence and a separate existence, most of the 
railway companies in New York City are con¬ 
trolled by a very few individuals, invisible, relent¬ 
less, greedy and indifferent to the public interest. 

The holding company is the combine of com¬ 
bines. It is of recent origin. It sprang into promi¬ 
nence soon after the United States Supreme Court 
handed down the decisions (1890-1892) in the 
Oil and Sugar Trusts, declaring the trust form of 
industrial combination illegal. Industrial devel¬ 
opment, however, decreed that business should 
combine, the decisions of the courts to the contrary 
notwithstanding. And business did combine. 


73 


74 


THE GREAT COLLAPSE 


If one form of organization is declared illegal 
another will be devised. When the trust was 
“busted” the legal acumen constantly at the elbow 
of big business immediately found a new scheme, 
the holding company, a combination no less effec¬ 
tual, no less monopolistic, no less given to possible 
abuse than the trust. This, the lawyers said, was 
a legal method because a corporation has a right 
to hold property, and stock is property. The 
courts, at first, upheld this view unreservedly. 

BP" 

The public utility corporations, particularly, 
are afflicted with the disease of the holding com¬ 
pany. Due to the fact that they are generally 
accepted as being natural monopolies, the railroad 
combines have not been subjected to as much leg¬ 
islative hindrance or moral disapprobation on the 
part of the public as have the industrial combina¬ 
tions. Taking full advantage of this partial im¬ 
munity, the traction trust has known no bounds 
in its spoliation. 

“The total capital employed in electric, gas, 
street, and interurban railway companies, com¬ 
monly called Public Utility Corporations, in this 
country to-day is estimated to exceed eight billion 
dollars , and of this capital nearly five and one-half 


THE GREAT COLLAPSE 


75 


billion dollars are controlled by holding companies 
and their subsidiary companies. . . . 

“Street and interurban railway companies rep¬ 
resent a total capital approximately five billion 
dollars. Of this sum it is estimated that not less 
than tr»o~thirds is controlled by holding companies. 
In the 28 cities of the United States having a 
population in excess of 2,000,000 the mileage of 
track controlled by holding companies is in excess 
of 61 per cent. Here, again, it is of interest to 
note that only four of these cities have more than 
one principal operating company and only two 
of these cities have companies that are really inde¬ 
pendently and separately owned.”* 

These holding companies fall into two groups. 

I. Those which own stock in other corporations 
and also operate routes of their own. Such are 
the Third Avenue Railway Company and the 
New York Railways Company. Holding com¬ 
panies operating routes themselves are called par¬ 
ent companies; the corporations whose stock is 
held are known as subsidiary companies. 

* From a brief submitted on behalf of public utility 
holding companies to the Interstate Commerce Com¬ 
mittee of the United States Senate, in the matter of 
Senate Bill No. 4160—reprinted in Gerstenberg’s “Ma¬ 
terial of Corporation Finance,” pp. 571-572. 



76 


THE GREAT COLLAPSE 


2. Those created solely for the purpose of 
owning stock in other companies. They own in 
order to control; and are only administrative in 
their function. Such are the Brooklyn Rapid 
Transit Company and the Interborough Consoli¬ 
dated Corporation. 

The holding companies are gigantic in scope. 
They exercise a decidedly monopolistic control 
over scores of corporations. 

In “the Brooklyn Rapid Transit Company 
system no fewer than 83 companies are repre¬ 
sented. Of these 83 companies, 67 have lost their 
identity through absorption, leaving but 16 distinct 
companies. Of these 16 companies, 9 are opera¬ 
ted under lease or agreement by other companies, 
thus leaving but seven operating companies. 
The seven operating companies are subject to a 
common control through a single company, the 
Brooklyn Rapid Transit Company.”* 

The Interborough Consolidated Corporation is 
a pure and unadulterated holding company. It 
exists solely for the purpose of controlling two of 
the largest systems of roads in New York, which 
are themselves holding companies. It controls the 
Interborough Rapid Transit Company, by own- 


* Preface, P. S. C. Reports, First Dist., 1913, v. 5. 



THE GREAT COLLAPSE 


77 


ing $33,812,800 worth of capital stock out of 
the company’s total capital stock of $33,000,000; 
it controls the New York Railways Company by 
ov/ning $15,276,558.20 worth of capital stock 
of the company’s total capital stock of $17,495,- 
060. These two systems have issued hundreds of 
millions of dollars worth of bonds, and carry 
almost half of all the passengers using local trans¬ 
portation in New York. The Interborough Con¬ 
solidated Corporation is the largest holding com¬ 
pany of its kind. 

A clear realization of how completely the three 
holding companies, the Third Avenue Railway 
Company, the Brooklyn Rapid Transit Company 
and the Interborough Consolidated Corporation 
control the transportation system in Greater New 
York, may be seen by referring to the three charts 
appended to Vol. II. of the Annual Report of 
the Public Service Commission for 1916. 

The economic advantages of combination , uni¬ 
fied control for the purpose of carrying on business 
on a large scale , elimination of duplicate service , 
duplicate overhead charges , etc., is not furnished 
by the holding company; there is no scientific 
unified management of the roads themselves al- 


78 


THE GREAT COLLAPSE 


though there is plenty of unity in the control of 
their financial policy; in fact, there is more unity 
of that kind of control than is good for the public. 
The holding company, as far as the people are 
concerned, is an instrument creating a complete 
monopoly of an indispensable public necessity in 
the hands of a few financiers. It retains all the 
disadvantages and evils of a combination without 
giving the compensating advantages. 

Back of the holding company are bankers, 
trust companies, insurance companies and such 
other public benefactors. Their purpose in own¬ 
ing the stock of the roads is not so much the col¬ 
lection of dividends, although this, too, is quite a 
consideration, but the large earnings which figure 
as expenses on the financial sheet but are in fact 
profits. This could not be successfully accom¬ 
plished save through intercorporate control, such 
as the holding company creates. There are finan¬ 
cial loans to be made by the subsidiary companies 
in which the financiers and other investing inter¬ 
ests are vitally interested. They secure for them¬ 
selves most favorable terms as bond holders. 
There are those fat underwriting fees, promoters’ 
fees, organization fees, which run into millions of 
dollars with every reorganization scheme of any 


THE GREAT COLLAPSE 


79 


of the large companies. These fees, when paid, 
are charged to the cost of the road. Such was 
the case in the reorganization of the Metropolitan 
Street Railway. Over $4,000,000 were spent on 
those items. Such was the case when the Inter¬ 
borough was raising money when it entered into 
the famous contract with the city in 1913. 

It is an old practice for the banker-director to 
make terms upon which he, as banker, would 
advance money to the corporation of which he is 
an influential director. This dual capacity of the 
director makes the corporation a source of con¬ 
stant sapping for the financier. Louis D. Bran- 
deis, now Justice of the United States Supreme 
Court, says: 

“A large part of these underwriting commis¬ 
sions is taken by the great banking houses, not for 
their services in selling the bonds, nor in assuming 
risks. Thus, when the Interborough Railway— 
a most prosperous corporation—financed its recent 
$170,000,000 bond issue, J. P. Morgan & Co. 
received a 3 per cent, commission, that is, $5,100,- 
000, practically for arranging that others should 
underwrite and sell the bonds.”* 

The financiers could not obtain such stupendous 


* Other People’s Money, by Louis D. Brandeis, p. 96. 



80 


THE GREAT COLLAPSE 


sums of easy money with so little difficulty if 
they did not immediately control those who con¬ 
trol the holding company which, in turn, controls 
the corporations. 

The money loaned to pay these fees and in¬ 
terest thereon are to be amortized out of the 
fares collected. Is there any wonder the corpora¬ 
tions are “losing money** on a five-cent fare? 


Chapter VII 
FRANCHISES 

HOW THEY ARE OBTAINED 

The future generation, looking at the remains 
of the haphazard lay-out of our transportation 
lines, will say with a great deal of sympathy and 
no little contempt: “What savages our ancestors 
were! They should be pitied for having lived 
in a world so wasteful, so unscientific and so 
inconvenient.” This would be the verdict of any 
sensible person not accustomed to the helter-skelter 
of New York life, who would take the trouble 
to traverse this city. There is no system to our 
street railways and scarcely any in our elevated 
lines and subways. If rails, properly separated, 
were thrown from the clouds to fall at random 
in New York streets there could hardly have been 
more confusion than there is to-day. 

One of the principal reasons for this state of 
affairs is the blind ignorance and corruption of a 
certain class of politicians who have ruled this city 
on and off for the past one hundred years. They 
have had neither the intelligence nor the will to 
perceive the city’s needs. There has been no defi- 


81 


82 


THE GREAT COLLAPSE 


nite policy, no guiding principle by which the af¬ 
fairs of the city were conducted any more than 
there is to-day. 

The chaotic and anarchic condition of our rail¬ 
way facilities is not due to blind natural forces or 
mere accident; on the contrary, it is the result of 
conscious consent of authority. No railway can 
be built without a special permission, without a 
franchise. 

“Franchises,” says Chief Justice Taney, of the 
United States Supreme Court, “are special privi¬ 
leges conferred by government upon individuals, 
and which do not belong to the citizens of the 
country generally of common right.”* 

There are four kinds of franchises—perpetual, 
limited-term, short-term, and indeterminate. A 
perpetual franchise is one which is granted for¬ 
ever. It is irrevocable. The grantee becomes 
vested of a right in the street of which he cannot 
be deprived; and it does not matter if the grant 
was obtained by questionable means. That it is 
an absurdity for one generation to grant away 
the rights of posterity is no concern of the law. 

The limited-term franchise is one granted for a 
definite time, at the expiration of which the com- 


* Bank of Augusta v. Earle, 13 Peters, 519-595. 



THE GREAT COLLAPSE 


83 


munity is re-invested with the rights it had given 
away. A limited-term is considered a period of 
between 99 to 999 years. To all intents and 
purposes a 999-year term is perpetual. Most 
street franchises in New York are either outright 
perpetual or for a “limited-term” of 999 years. 

A short-term franchise is one granted for a 
period ranging from 10 to 99 years. Such grants 
are looked upon with great disfavor by all sides, 
because it prevents good service to the public and 
is of no special value to the corporations. 

The indeterminate franchise is one, the duration 
of which is uncertain, depending upon the be¬ 
havior of the company as well as the policy of the 
municipality. It is a tenure during good behavior, 
as it were. Such franchises usually provide that 
the city has a right at any time it so decides to 
take over the properties upon paying the then fair 
value thereof exclusive of the franchise. An 
indeterminate franchise presupposes government 
regulation. 

What gives a man or group of men a superior 
right, or as is more accurately designated, a privi¬ 
lege to use a street to the practical exclusion of 
others? How do a few individuals obtain these 


84 


THE GREAT COLLAPSE 


“rights” to capitalize a common need of a people 
of a city, own and use it for their private profit? 

The history of franchises in New York is 
the darkest chapter in municipal history. If one 
wishes to learn how much of a corrupting influence 
private ownership subject to governmental control 
is; if one desires to fathom to what depths of 
criminal practices politicians will sink and how 
far they permit themselves deliberately to betray 
their constituencies; if one wishes to chill his faith 
in the “rule of the people,” let him delve into the 
mire of franchise history in New York. Dr. Mila 
Roy Maltbie, once a member of the Public Ser¬ 
vice Commission, and probably its ablest member 
since its inception, in summarizing a “History of 
Franchises in New York City,” says: 

“The preceding pages reek with instance upon 
instance of corruption and robbery of the city, but 
the half has not been told. If only the evidence 
had been presented which is to be found in court 
records and proceedings of legislative investiga¬ 
tions, to say nothing of well substantiated reports 
and the vast Augean stables closed to public eyes, 
the reader would rebel and throw aside the nau¬ 
seating narrative. Indeed , one is almost convinced 


THE GREAT COLLAPSE 


85 


that not a single franchise in New York City, with 
the exception possibly of many wharf and ferry 
privileges, has been gained without corrupt 
means.”* This leads one to ponder well whether 
the claim may not be true, which is made by 
ardent supporters of municipalization, that private 
control of franchises almost surely leads to cor¬ 
ruption, and that with all their official corruption 
and dishonesty conditions would not have been 
and would not be as bad, if municipal ownership 
were adopted, as under private ownership.”*)* 

Long before the first railroad franchise was 
granted, in 1832, the need of transportation fa¬ 
cilities more adequate than the stage coach could 
furnish, became imperative. In spite of the bright 
prospects for profits in railroad investments capi¬ 
talists stood aloof. 

In the first place, industrial investments were 
so remunerative that capital was not anxious to 
venture into a new and doubtful field. Capitalists 
do not make investments out of a desire to serve 
the community. Their motive is profits. 

In the second place, they held back in order 


* Italics are mine. 

f History of Franchises, Gustavus Myers, p. 200. 



86 


THE GREAT COLLAPSE 


to secure the maximum advantages. The argu¬ 
ment, so familiar to all was used then as it is now: 
Capital is timid, it needs encouragement. The 
people were so skillfully played upon that they 
began to view the prospective railroad investor as 
a great public benefactor. He was a heroic soul 
ready to make all sacrifices for the people. He 
was the industrial explorer discovering strange and 
hitherto unknown fields. In true appreciation for 
his devotion to the community, the man seeking 
to build a railroad was given every opportunity to 
accomplish his purpose. He was given the public 
streets free, no rights were reserved for adequate 
regulations, no time limit was set to his privilege 
to keep the streets; he was even granted special 
subsidies. 

Meanwhile, the city was growing by leaps and 
bounds. The influx of foreigners was enormous. 
The political upheavals and famines in Europe, 
coupled with the introduction of the steamship 
about that time, making water transportation safer, 
speedier and cheaper, accellerated greatly the 
immigration to our shores. According to the Fed¬ 
eral census the population of Manhattan Island 
increased from 60,489 in 1800 to 615,000 in 
1850, to 942,000 in 1870. 


THE GREAT COLLAPSE 


87 


The first railroad lines built proved to be very 
successful. The profits were enormous. There 
was a scramble for franchises. Though the public 
was slow in realizing the value of its streets, the 
politicians were not. They discovered that a 
franchise will command a price. 

A new kind of politician sprang into existence. 
His sole purpose in seeking election was to be able 
to sell franchises. He looked upon his vote in 
the Board of Aldermen, by which franchises were 
granted, as his private property, and had a right 
to sell it; in fact, what he was selling was not 
public franchises at all, but his private vote, and, 
therefore, committed no grave wrong. Bribing 
aldermen became the common thing. It was as 
conventional and natural for an alderman to ac¬ 
cept a bribe as it was for the Russian administra¬ 
tors under the Czar. 

Year after year men with heavy clouds of sus¬ 
picion hanging over them, belonging to an organ¬ 
ization recognized as the public school of corrup¬ 
tion—Tammany Hall—were returned to office to 
“govern” the city. Towards the end of 1852, ru¬ 
mors of rampant corruption and bribery in the City 
Council were rife. The thieves fell out among 


88 


THE GREAT COLLAPSE 


themselves, and, as usual, the truth came to light. 
From an affidavit by a James A. Coulter, a 
lobbyist, a man of the inside, the public learned 
of the existence of thoroughly organized agencies 
“to receive and distribute bribe money.” On 
February 26th, 1853, the grand jury, after a 
careful investigation, reported that Aldermen re¬ 
ceived bribes for granting various franchises, and 
continued: 

“It was clearly shown that enormous sums of 
money had been expended for and towards the 
procurement of railroad grants in the city, and 
that towards the decisions and procurement of 
the Eighth Avenue railroad grant a sum so large 
that would startle the most credulous, was ex¬ 
pended, but, in consequence of the voluntary ab¬ 
sence of important witnesses, the grand jury was 
left without direct testimony of the particular re¬ 
cipients of the different amounts.”* 

Such exposes were frequent. Every once in a 
while the people would be mortally shocked by 
some foul act of their representatives. The city 
would rock with indignation. 

* Documents of the Board of Aldermen, XXI, Part 
II, No. 55—quoted in Myer’s History of Franchises, 

p. 116. 



THE GREAT COLLAPSE 


89 


Unfortunately for democracy, the people have 
extremely short memories. Moved by a wave 
of temporary excitement they defeat the misde¬ 
meanants, organize some nondescript fusion ticket 
and sweep it into office. Before long the would- 
be reformers, permeated by a large amount of 
the old stock, become deformers; they find the job 
of bartering away the people’s interests very profit¬ 
able. They usually out-tammany Tammany. 

Things would become so bad that the people 
began to long for the good old days. At the 
same time Tammany Hall, the “bad man” in 
politics, puts on the garment of virtue, gets unto 
itself some “clean” leader, a “servant of the 
people,” re-enters the political fight, and, with the 
aid of the dead and the babies, all of whom are 
registered and voting, with the aid of stuffed 
boxes, and such other political acts as are deemed 
necessary, the “clean” candidate is “victorious.” 
This has been a repeated performance in New 
York politics since the day when the memory of 
man runneth not to the contrary. 

By 1860 the Legislature, moved by a feeling— 
on the part of some to relieve the people of New 
York City from the irreparable injury being done 
to them by a pack of organized crooks, and on 


90 


THE GREAT COLLAPSE 


the part of others, by sheer envy at the lucrative 
profits made by the Aldermen—passed a law 
taking away from the council the power of grant¬ 
ing franchises, and vesting it exclusively in itself. 
Conditions were so bad in the city government 
in those days that there was not a murmur of pro¬ 
test from any source against these violations of 
home rule, except, of course, from the City Coun¬ 
cil itself, which felt aggrieved at being deprived of 
such a valuable source for private enrichment. It 
looked upon the Legislature as its foremost busi¬ 
ness competitor. 

The people chose the lesser of two evils. To 
permit the Legislature, sitting over one hundred 
miles away from the city and composed of repre¬ 
sentatives from all over the state, to regulate the 
streets in New York was deplorable; but, reasoned 
the people, at least it will be an honest regulation; 
if by reason of its distance from the city the Legis¬ 
lature errs in some things, it was preferable to 
being constantly sold out and deliberately betrayed 
by a corrupt Council at home. 

What a smashing disappointment and terrible 
disillusion this was! Within a month of the pas¬ 
sage of the act the franchise lobbyists, railroad 
advocates, promoters and schemers removed their 


THE CREAT COLLAPSE 


91 


seat of operation to Albany. They beseiged the 
capital. Trained in the art of lobby warfare, 
encouraged by years of victory, equipped with 
the most poisonous weapon—gold—the invading 
New York hoards overwhelmed the weaklings 
stationed at the Albany post to guard the interest 
of the people. The Legislature shamefully sur¬ 
rendered. 

Dozens of bills granting franchises to rival 
companies were introduced. The flames consum¬ 
ing honest government at the City Hall enveloped 
the capitol and reduced the good name of the 
State to ashes. The legislators were even more 
brazen and crooked, if such a thing were possible, 
than the Aldermen. Criticism by the Governor 
was listened to with impatience and contempt. 
They took to graft as hungry wolves take to 
their prey. 

Five franchises, which, with the possible excep¬ 
tion of Broadway, constituted the most valuable 
remaining thoroughfares in the city, estimated at 
that time to be worth between fifteen to twenty 
million dollars, were delivered to speculators and 
railroad sharks almost without any compensation. 

“It was generally believed that the passage of 
these five bills cost the projectors $250,000 


92 


THE GREAT COLLAPSE 


in money and stock, distributed among the pur¬ 
chasable members of the two houses of the Legis¬ 
lature. Some persons, who profess to know, put 
the cost of one-half million dollars.”* 

Competition brought down the price of an 
assemblyman’s vote considerably. The Board 
of Aldermen maintained a much higher standard. 
Between $300 and $400 was all an assemblyman 
was to receive for his vote on a Broadway bill, 
a franchise which later netted $22,000 to each 
Alderman for his vote. Besides the unpardonable 
fault of selling their votes too cheaply, upstate 
legislators measured up well to the standards 
of “honesty” set by New York representatives. 
They were not all averse to accepting bribes for 
voting away New York City’s rights. Republi¬ 
cans were no different than Democrats. The latter 
had no monopoly on corruption. Lobbyists gen¬ 
erally agreed that it did not matter who was 
elected, for it cost less to buy a legislator than to 
elect one. 

On April 23, 1863, the Broadway railroad 
bill came up for final passage. Charm and dig¬ 
nity were lent to the proceedings and deliberations 
when the august statesmen were made aware of 


History of Franchises, Gustavus Myers, pp. 124-1.25. 



THE GREAT COLLAPSE 


93 


the presence of police, who came to the chamber 
to enforce the law against the lawmakers. 

“About 9 o’clock an officer of the city police 
court appeared in the lobby with a large number 
of subpoenas, addressed to members of the house 
and gentlemen of the lobby, from which it ap¬ 
peared proceedings of some sort had been com¬ 
menced in that court against Speaker Callicot, the 
precise character of which seemed to be known 
to no one. 

“Up to midnight an intense excitement pre¬ 
vailed, and the officer in question continued to 
search for those whose whereabouts could not be 
ascertained. It was finally concluded on all hands 
that the proceedings were nothing more or less 
than a strategic movement having reference solely 
to the Broadway bill. . . 

The next day, only one day before the time set 
for adjournment, marked by the usual confusion 
and disorder of the adjournment of the August 
legislature, “the final vote was taken amid vehe¬ 
ment charges of corruption and all sorts of un¬ 
worthy influences. **f 

This intolerable condition kept up unabated 


♦Albany dispatch, New York Times April 23, 1863. 
f Albany dispatch, New York Times, April 24, 1863. 



94 


THE GREAT COLLAPSE 


until 1874. The constitutional convention, held 
that year, incorporated a provision in the Consti¬ 
tution to the effect that no franchises might be 
granted without the consent of the local authori¬ 
ties and half the owners of property along the 
contemplated route, failing the latter, the consent 
of the General Term of the Supreme Court. 
This amendment was adopted by the people and 
went into effect January 1, 1875. It was a rebuke 
administered to the Legislature by a resentful 
people for the shameful betrayal of the people’s 
trust. 

The limitations placed by law on the Legis¬ 
lature’s powers were such as to make it almost 
impossible to grant a franchise in New York with¬ 
out making a bargain with the City Council. As 
a result, for nine years, all attempts at passing 
railway grant bills, except the Rapid Transit Act 
of 1875, proved futile. 

In 1884 a law was passed again giving the 
local authorities the power to grant railway fran¬ 
chises. The promoters and speculators worked 
zealously for its passage. The same year, the 
Board of Aldermen granted away what was at 
that time the most valuable franchise in the city, 
the right to run a railroad on Broadway. The 


THE GREAT COLLAPSE 


95 


battle to “get Broadway,” the street considered 
at that time as the pride and the key of New 
York, raged for over twenty years. The history 
of the Broadway franchise battle, both in the 
Legislature and City Council, abounds with crim¬ 
inal incidents. There were many competitors for 
this prize. 

As far back as May of that year “deals” were 
entered into between the Aldermen and the com¬ 
panies on a resolution to be voted on August 6th. 
Each competitor company offered a large com¬ 
pensation for the franchise, not to the city of 
course, but to the Aldermen. The price an Alder¬ 
man received for his vote was unusually high 
$ 22 , 000 . 

Happily there were too many conflicting in¬ 
terests in this affair to permit full secrecy. The 
truth leaked out. The Aldermen were indicted 
and convicted. Three Aldermen, Duffy, Full- 
graff and Waite, turned state’s evidence. Some 
of the sentences imposed by Recorder Smythe 
were as high as nine years and ten months. At the 
trial before Recorder Smythe, on November 19th, 
1886, Alderman Fullgraff (significant name!), 
testified thus: 

“A special meeting of the Board was held in 


96 


THE GREAT COLLAPSE 


my factory, on Fulton Street, in the month of 
May, 1884. There were thirteen members pres¬ 
ent. They were, De Lacy, Dempsey, McLough- 
lin, Sayles, McQuade, McCabe, Kenney, Jaehne, 
Cleary, Reilly, O’Neill, Duffy and myself. It 
was proposed that the thirteen vote together on 
everything that came up except on political issues. 

“It was determined to have a meeting at 
McLoughlin’s house a week later. At this meeting 
the same thirteen were present. The first subject 
taken up was the Broadway franchise. It was 
stated that a cable railroad company had applied 
for the privilege. It was said that the company 
had offered $750,000, half cash and half bonds, 
and that the Broadway Company had offered 
$500,000 in cash. I think Jaehne said that the 
acceptance of the $750,000 would be risky, as 
the bonds could be traced. He thought the 
Broadway Surface people would be safer.”* 
The irony of this unspeakable crime is that the 
law, the violation of which resulted in sending 
the thieves to long terms at hard labor, protected 
the criminals in their theft; it gave them the fran¬ 
chise. Although it was charged and proven that 
the Aldermen received bribes for voting the way 

* Quoted in Myer’s History of Franchises, p. 139. 



THE GREAT COLLAPSE 


97 


they did, yet the public rights they gave away 
were binding upon the city forever. Although it 
was charged and proven that Jacob Sharp and 
friends to whom the grant was given corrupted the 
Board of Aldermen by paying to its members 
large bribes, yet the grant which they thus ob¬ 
tained could not be taken away from them. That 
is the law! 

When the matter of annulling the stolen fran¬ 
chise came to the court, it held that the grant, the 
interest in the streets, was perpetual and indefeas¬ 
ible ; that it was a vested interest, and the directors 
must act as trustees for the creditors and share¬ 
holders. 

The plain people may not fully comprehend 
how a “right” obtained by corruption and fraud 
can become “vested,” but then they do not know 
the line points of the law. The only danger in 
this decision is that the people are likely to assign 
to all “vested interests” a criminal and fraudulent 
origin. Such a feeling, taking root among the 
people, will do more to undermine the “founda¬ 
tion of modern society” than thousands of Social¬ 
ist speeches. 

A fruitful source of revelations of corruption 
and graft was the exceptionally low depth to 


98 


THE GREAT COLLAPSE 


which the Aldermen sank. They even failed to 
observe the “honor” observed among thieves. 
They became extremely undependable. They ac¬ 
cepted bribes from one company to vote for its 
project, then they would accept money from its 
competitors to betray the former. They would 
award the franchise to the highest bidder, but 
they would accept both bids. 

It is needless to go into further details to show 
the manner in which railroad franchises were ob¬ 
tained in New York City. Suffice it to say that 
the grounds upon which the companies established 
their “vested rights” in the New York streets are 
invalid; their successors must be treated as re¬ 
cipients of stolen goods with complete knowledge 
of the facts; their title is, from every point of view, 
faulty. The people will some day demand a 
return of their stolen possessions. 


Chapter VIII 


STEALING THE “UNDERGROUND 
HOLE” 

SUBWAY CONTRACTS OF 1900-1902 

Very few people know that New York City, 
the metropolis of the world, owns the greater and 
most important part of its transit facilities, the 
subway system. Still fewer people know that 
there was a referendum on the question and that 
the citizens cast an overwhelming vote in favor of 
municipal ownership. It is not strange that they 
do not know, for, although the people voted for 
municipal ownership, although the city spent hun¬ 
dreds of millions of dollars in building a rapid 
transit system, the authorities lack courage, will¬ 
ingness and intelligence to make municipal owner¬ 
ship a fact in the life of our city. Not only that, 
but they used the opportunity presented by the 
vote for municipal ownership as a cloak for one 
of the greatest steals in the history of our city up 
to that time. 

The first subway contracts known in official 
language as contracts Nos. 1 and 2, are robberies 
committed mid-day, in full view of all. Com- 


99 


100 


THE GREAT COLLAPSE 


pared to this all previous private acquisitions of 
the city’s possessions are mild and unimportant. 
The curious thing is that in the consummation of 
these infamous contracts, the devil managed to 
bring together the well-meaning but short-sighted 
reformer, the cunning financier and the vicious 
politician. Considering who the midwives were 
it is to be marvelled that the offspring is not ac¬ 
tually worse than it is. 

For a number of years after their construction, 
in the eighties, the elevated railroads were ample 
and satisfactory as rapid transit facilities. They 
offered complete relief from the intolerable con¬ 
gestion existing prior to their advent. Like all 
things it carried within itself the elements of its 
own destruction. By opening up new areas for 
residential purposes it laid the foundation for a 
greater congestion. 

With the constant and feverish growth of the 
city, the industrial centers and the residential sec¬ 
tions grew apace. In some cases people spent 
extremely unpleasant hours in their daily travel 
to and from their daily work. Mere inconve¬ 
nience soon became an intolerable burden. People 
were herded like cattle into suffocating cars with 
no adequate seating capacity. Only one taking 


THE GREAT COLLAPSE 


101 


the Brooklyn-bound elevated train on the Brook¬ 
lyn Bridge in the six o’clock rush hour can fully 
appreciate the agony and feeling of the people at 
that time. The daily traveller began to view the 
transportation facilities of the city as a hell on 
earth. Demands were made with increasing per¬ 
sistence for better and more rapid transit. Rapid 
transit was the issue of the hour. 

The elevated railroads, the rapid transit of yes¬ 
terday, became the horse-car of to-day. Having 
covered the surface, having gone into the air, the 
next step in quest for relief was the “underground 
hole.” 

One of the greatest weaknesses in the structure 
of our government is its irresponsiveness to the will 
and need of the people. It takes the authorities 
years before any popular demand is satisfied. 
Officials move inconveniently slow. 

Long delays result in increasing popular pres¬ 
sure. A point is reached when action must be 
taken in haste to appease popular indignation. 
Things done in haste are seldom done well. 

Public needs held back until they become press¬ 
ing, is good politics. What cannot be accom¬ 
plished when people are frantic about something! 


102 


THE GREAT COLLAPSE 


Vicious and discredited political organizations 
are swept into power for “championing the cause.” 
When in power the condition of immediate neces¬ 
sity, action in a hurry is a justification for all sorts 
of vicious designs to do evil. 

In 1891, the State Legislature, in pursuance to 
a strong popular demand, enacted a Rapid Transit 
Act* providing for the appointment of a Board 
of Rapid Transit Commissioners to investigate 
whether the public interest required the construc¬ 
tion of an underground rapid transit railway, and 
if they found it did, to lay out the routes, establish 
plans for constructions, get the necessary consents, 
and sell at public auction the privilege of con¬ 
structing the road, and operate it for a stated 
number of years. All public offers to sell this 
franchise for a “limited-term” of 999 years proved 
futile. Only one bidder, said to have been irre¬ 
sponsible, appeared. He offered a ridiculously 
small sum as compensation to the city, and the bid 
was rejected. There seemed to be a conspiracy 
not to pay anything for the greatest of all fran¬ 
chises. Why pay when it was reasonably certain 
that the companies could get it for nothing, if they 
waited? And they waited. 


* Chapter 4, Laws of 1891. 



THE GREAT COLLAPSE 


103 


Those who proposed selling railroad franchises 
at auction as the final remedy against public loot, 
once again, and for the last time, saw how suc¬ 
cessfully their ideas failed. The “ring” was not 
to be outwitted or outdone by auctions. Re¬ 
sponsible railroad companies would not bid. 
There was no competition to secure the most prof¬ 
itable system of railroads! Private understand¬ 
ings among the railroad interests are as effective 
and binding as if they were bound by a sealed 
agreement. 

They declared an “open strike.” With the 
intolerable congestion unrelieved the “open 
strike,” the “folding of arms” on the part of the 
capitalists, their refusal to invest in the building 
of new lines, was bound to succeed. Such power 
in the hands of an extremely small group of peo¬ 
ple, who do not hesitate to use it in holding up 
the city, is dangerous. 

When street cleaners or policemen employed 
by the city, fold their arms and demand decent 
human conditions and a living wage, they are de¬ 
clared to be outlaws. The wrath of the “public” 
is upon them. The entire power of the govern¬ 
ment is used to crush the “arrogance” of the men 
who engage in a “hold-up” of the city. But when 


104 


THE GREAT COLLAPSE 


the railroad financiers refuse to build roads in 
order to press the city against the wall, compel it 
to grant most favorable concessions, hold up the 
traveling public who have no option but to use 
the roads, for fabulous profits, they are not de¬ 
clared outlaws; in fact, they are held out as the 
most patriotic and “best people” in the commu¬ 
nity. 

The first four years the Rapid Transit laws 
of 1891 were a dead letter. They were years 
crowded with discontentment. Abuses multiplied 
in profusion, congestion on cars was growing 
worse. The people were prepared to go to ex¬ 
tremes to get relief. 

In the confusion the reformers got on the job 
and gained a footing. They usually fish in 
muddy waters. Former Mayor Hewitt, a staunch 
advocate of municipal ownership of railroads—a 
certain kind of municipal ownership, got on the job. 
In 1894, the Chamber of Commerce, of which 
Mr. Hewitt was a member and the moving spirit, 
drafted a bill and had it introduced in the Legis¬ 
lature providing for municipal ownership of roads, 
which should be leased to a private company for 
operation. The bill, as passed, was amended 
providing for a popular referendum on the ques- 


THE GREAT COLLAPSE 


105 


tion. In the elections of that year municipal own¬ 
ership of rapid transits was approved by an over¬ 
whelming majority, the vote being 132,646 for 
and 42,916 against. 

The commission made plans for the construc¬ 
tion of the Manhattan and Bronx subways. The 
courts did not like these plans. They were 
“revised.” 

The city had a great deal of trouble in over¬ 
coming the constitutional limitation on its borrow¬ 
ing capacity. At that time, and even now, the 
city was head over heels in debt. The margin of 
credit appeared to be less than the estimated cost 
of construction, which ranged between $39,000,- 
000 and $50,000,000. The money problem was 
partly solved by the successful consolidation on 
January 1, 1898, into one city of Greater New 
York, four counties and part of a fifth, four cities, 
twenty-one towns and fifteen villages, all of which, 
though having debts to be paid, had a combined 
borrowing capacity for greater than that of Man¬ 
hattan alone. Then the adoption a year later of 
the constitutional amendments excepting certain 
county debts from the 10 per cent, limitation of 
the city’s borrowing capacity widened the margin 
of credit still further. 


106 


THE GREAT COLLAPSE 


When the city had money to spend, it soon 
discovered that it had many friends ready to do 
business with it. Accordingly, on February 21, 
1900, what is known as Contract No. 1 was exe¬ 
cuted between the city and John B. MacDonald, 
who later assigned his contract to the Inter¬ 
borough Rapid Transit Company. Briefly, the 
agreement includes the following points: 

1. The contractor, Mr. MacDonald, and his 
successor, the Interborough Rapid Transit Com¬ 
pany, were required to build the subways and lay 
the tracks at the city’s expense; the equipment to 
be provided by the contractor at his own expense. 

2. The contractor is to operate the road for 
50 years, with the right of renewal for 25 years 
more. During this period of 50 years the city is 
to receive annually the sum equal to the interest 
payable by the city upon the bonds it issued for 
the purpose of raising money for subway con¬ 
struction and also an annual sum of 1 per cent, 
of the entire amount so invested to be deposited 
in a fund, which at the end of the 50 years will 
be sufficient to retire all the bonds. If the com¬ 
pany availed itself of its privilege to renew the 
lease for another 25 years it was required to pay 


THE GREAT COLLAPSE 


107 


an annual rental not less than the average amount 
annually paid during the preceding 10 years. 

3. At the end of the stipulated term the city 
was required to buy from the companies its rolling 
stock and other equipment in connection with the 
subways, at a reasonable price; in case of dis¬ 
agreement, the price to be fixed by arbitration. 

4. The equipment, the property of the con¬ 
tractor as well as the subway itself were exempt 
from taxation. The fare was to be five cents. 
The general relation between the city and the 
company was that of landlord and tenant. 

Contract No. 2, executed July 21, 1902, be¬ 
tween the city and the Rapid Transit Subway 
Construction Company, which, on August 10, 
1905, assigned its contract to the Interborough 
Rapid Transit Company, is substantially the same 
as Contract No. 1, except that the term of the 
lease is 35 years instead of 50 years. It also car¬ 
ries the privilege of renewal for 25 years. The 
35-year provision was a concession to the protest¬ 
ing public against the injustice of the former con¬ 
tract. This subway was an extension from City 
Hall, Manhattan, to Atlantic Avenue, Brooklyn. 

These are no contracts, they are holdups. The 


108 


THE GREAT COLLAPSE 


city builds the subways, spends tens of millions of 
dollars of the people’s money and gives them 
away free for fifty years to a corporation to make 
unheard-of profits on them. 

This species of municipal ownership, so neatly 
“put over” on the people, ought to serve as a les¬ 
son, and it should be a warning to the honest ad¬ 
vocates and adherents of collective ownership not 
to make alliances with, or place faith in politicans 
ever ready to exploit a popular demand, to use a 
healthy and sound principle as a vote-getter, and 
then pervert it to an evil use. Alluring promises 
in politics should be linked in with the general 
actions, economic and social beliefs as well as 
the past performances of those who make the 
promises. 

The whole contract is camouflaged by the fact 
that at the end of 50 years the city will get the 
subways unencumbered. But who is removing 
the encumbrance? Did not the city pay for the 
construction of the subways? And is not the 
public paying the interest on bonds and building 
a retiring fund out of the fares it pays? What 
contribution is the Interborough making to this? 
None. 

It is obvious that the company’s allowance of 


THE GREAT COLLAPSE 


109 


interest and sinking fund to the city is no payment 
at all for the privilege it has received. For had the 
company borrowed money on its own credit for 
the purpose of constructing subways, the principal 
and interest would have had to be paid in the 
course of 50 years, just as other bonds issued by 
the company. Such interests and sinking funds 
are fixed charges. They are taken out of the 
fares of the traveling public and are considered 
part of necessary expenses. 

In a word, the lines are a pure gift to the Inter¬ 
borough. 

To call these funds paid to the city “rentals” 
is to add insult to injury. By no stretch of the 
imagination can one truthfully call them a rental. 
As a matter of fact, what really happened was 
this: the city lent its credit to a private corpo¬ 
ration whereby the corporation secured money not 
to exceed $50,000,000 on bonds bearing 3/i per 
cent, interest instead of 5 or 6 per cent., as might 
have been the case if the company itself, with its 
inferior credit, had to borrow it. Consequently, 
it is not the city that is getting any rentals, but the 
Interborough Rapid Transit Company. In the 
course of 50 years the company will receive from 
the city on this item alone somewhere between 


110 


THE GREAT COLLAPSE 


$26,000,000 to $47,000,000. Not only does 
the company receive the franchise free, but it also 
receives an enormous subsidy into the bargain. 

As might have easily been foreseen, the sub¬ 
ways proved to be a gold mine. The company is 
earning up to this very day close to $7,000,000 
profit annually, over and above all the excessive 
rentals, such as the one paid to the Manhattan 
Rilway Company for the elevated lines, all the 
“fixed charges,” and all the interest on bonds. 
Eliminating unnecessary and swelled “charges” 
the company is earning between 20 and 25 per 
cent, profit on its actual investment. The city, 
which built the subways, earns nothing. It 
donated its right and property to a private 
corporation. 

The returning of the roads to the city with the 
provision requiring it to buy the equipments of the 
company is not very alluring. With the rapid 
changes in the art of transportation and the rapid 
shifting of centers of population the old subways 
may either enjoy the standing of the present horse- 
car system or they may be so out of range of the 
traveling public as to become practically valueless. 


Chapter IX 

THE NOTORIOUS PARTNERSHIP 

SUBWAY CONTRACTS OF 1913 

Any problem not settled right is not settled 
at all. When the first subway projects were be¬ 
ing planned, the legal limitations of the city’s 
credit prevented the system from being compre¬ 
hensive. The only two boroughs that were cov¬ 
ered, and those not adequately, were Manhattan 
and the Bronx. Brooklyn was barely touched at 
all. Greater New York could hardly be satisfied 
with existing subways. 

Meanwhile, the meaning of the first and second 
contracts was beginning to dawn upon the people. 
Its details were learned with great astonishment. 
It became clear that the city’s interest had been 
bartered away. A hue and cry went up against 
any further dealings of that character. A wave 
of indignation swept the city. The agitation be¬ 
came so persistent that in 1906 a law was enacted 
forbidding the leasing of any new subways for 
longer than 25 years. 

In 1907 the Board of Rapid Transit Commis¬ 
sioners were succeeded by the Public Service 


111 


112 


THE GREAT COLLAPSE 


Commission. This body was to be appointed by 
the Governor and was endowed with sweeping 
powers. All franchises were to be granted and 
public utility contracts entered into by the Com¬ 
mission on behalf of the city. Such agreements 
would not be binding, however, upon the city until 
the Board of Estimate and Apportionment had 
approved them. 

Generally the state government has been Re¬ 
publican, the city administration Democratic— 
Tammany. The commission was created by a 
Republican Governor, Mr. Hughes. At the time 
the city was enjoying a Tammany Mayor, Mr. 
McClellan. A Republican commission and Dem¬ 
ocratic Board of Estimate and Apportionment are 
not likely to get along very sweetly. The dual au¬ 
thority was responsible for a great deal of un¬ 
necessary delay in the attempted solution of our 
transportation problem. For political reasons 
each body sought to discredit the action of the 
other, with the result that the city was scan¬ 
dalously neglected. 

For eight years subway negotiations went on. 
Plans were made and remade. Proposals accept¬ 
able to the Commission were rejected by the 
Board of Estimate and Apportionment, and vice 


THE GREAT COLLAPSE 


113 


versa. Attempted schemes were dragged into the 
courts on six different occasions to prevent their 
execution. Demagogues on both sides played on 
the people for all the problem was worth, and it 
was worth a great deal. Politicians were made 
great, were elevated to the acme of municipal 
power, then dropped from the heights and con¬ 
signed to the army of political pygmies in oblivion. 
Reputations were easily made and as easily 
destroyed. 

The stake was indeed stupendous. The Rapid 
Transit plans involved an expense of over $330,- 
000,000 and an enlargement of the rapid transit 
carrying capacity to 2,000,000,000 passengers 
per annum, which is over 300,000,000 passengers 
more than the total number carried in the year 
1912 on all New York City local transit lines, 
including the surface street cars. Such a stake 
is worth fighting for. He who got tangled up in 
these millions was caught in a golden net. 

The struggle came to an end when, on March 
19, 1913, the Public Service Commission for the 
First District, on behalf of the city, with the con¬ 
sent of the Board of Estimate and Apportion¬ 
ment, entered into a contract with two companies, 
the Interborough Rapid Transit Company and 


114 


THE GREAT COLLAPSE 


the New York Municipal Railway Company, a 
subsidiary of the Brooklyn Rapid Transit Com¬ 
pany. 

Generally, it may be said, the Interborough 
Company was to operate in Manhattan and the 
Bronx and touch a small part of the business heart 
of Brooklyn and Queens, while the Brooklyn 
Rapid Transit Company was to operate in Brook¬ 
lyn and Queens. The former is known as Con¬ 
tract No. 3, the latter Contract No. 4. 

The city acts in a dual capacity in these con¬ 
tracts, but that is not the reason the Rapid Transit 
plan is called the dual system. On the one hand, 
the city acts as a partner to each of the companies, 
on the other as a landlord. 

The city is a partner in contributing vast sums 
of money, in furnishing franchises, and placing all 
the power and prestige of the metropolis back of 
the Rapid Transit system, but it is not a partner 
in reaping the enormous benefits flowing from such 
a system. For all practical purposes the partner¬ 
ship ends where benefits begin. 

Having a voice in the management of the busi¬ 
ness or making provision for an equal division of 
earnings is not in line with the politicians’ concep¬ 
tion of sound municipal policy. On these ques- 


THE GREAT COLLAPSE 


115 


tions the city puts on the garb of landlord; the 
operating company being the tenant. When the 
subway employees were out on strike for human 
conditions, the city authorities, even if they had the 
willingness—a sin with which it would hardly be 
fair to charge them—had no right “as a partner” 
to act in the matter, excepting to exert pressure 
indirectly such as any municipal authority would 
be able to exert on a company operating a public 
utility. 

The contract is voluminous and involved, cov¬ 
ering 700 printed pages. It goes into extreme de¬ 
tails settling all questions imaginable, but hardly 
touching the interest of the city. After reading 
it one feels it is a document showing that New 
York has made an “agreement with the devil and 
a covenant with hell.” Every stray dollar of the 
city’s money has been annexed by the diligent 
companies while the annexing was good. 

Mr. Shonts warns the city that unless fares 
are raised the city will lose tens of millions of 
dollars. His well-known friendship for the city 
is only excelled by his desire to get an 8-cent fare. 
Mr. Shonts perhaps remembers the arguments 
made against the notorious dual contract. It was 
then pointed out that the city will be a heavy 


116 


THE GREAT COLLAPSE 


loser; that accounts could be so manipulated by 
the company that even payment on interest and 
sinking fund on the city’s investments would be¬ 
come impossible; that these conditions would be 
held up before the inhabitants of the city as an 
urge to grant new concessions to the company 
making the citizens believe they are doing it for 
their city. 

These arguments were made before the war 
showing that the present financial “embarrass¬ 
ments” are not due so much to war conditions as 
to the inherent weaknesses of the contract. The 
outrageous demands of the companies must be 
met by hurling into their face the contracts they 
managed to impose upon the city. 

The contract provides that the earnings of the 
old and new lines be pooled. It will be recalled 
that the old subways, built with city money, about 
$60,000,000 in all, net the city an amount equal 
to interest payable on the bonds issued for that 
purpose, a sum for a retiring fund and no more. 
This provision will continue until the end of the 
new contract. 

The Interborough Rapid Transit Company, 
the operator with an actual investment of about 
$48,000,000, is to receive interest on the bonds 


THE GREAT COLLAPSE 


11 7 


issued, a sum for a retiring fund, plus $6,350,000 
annually, representing its average annual net profit 
ending June 30, 1911. These $6,350,000 rep¬ 
resent a little over 13 per cent, on the company’s 
money invested, and is to be a guaranteed profit 
for a period of 50 years. 

The companies made it certain that whatever 
changes are made in the local transit system, how¬ 
ever unimportant the old subway lines may be¬ 
come, however little the old lines may actually 
earn because of having been superseded by other 
lines, the stupendous profits made in the early 
years of exceptional congestion and extreme neg¬ 
lect of property, should be guaranteed for its en¬ 
tire life. In other words, $31 7,500,000, almost 
seven times the investment proper, will be taken 
out of the earnings of the general rapid transit 
system, between 1915 and 1965 and given to the 
company as pure profit in payment for the suc¬ 
cessful robberies embodied in the contracts of 

1900 and 1902. 

It should be remembered further that the origi¬ 
nal contracts were to expire in 1954 and 1943, 
respectively, with the privilege of renewal for 25 
years. The new contract makes all subway leases 
coterminus. It “levels” them up instead of 


118 


THE GREAT COLLAPSE 


down. It makes a bad bargain worse. It extends 
their terms considerably, making them last till De¬ 
cember 31, 1963, and guarantees an annual pref¬ 
erential profit of $6,350,000 up to that date. 
This stupendous sum is to be paid before the city 
gets anything at all on its new investment; even 
before it receives interest on the bonds it issued for 
that purpose. 

Although the city is an “equal partner,” the 
company receives 6 per cent, on all the money it 
invests as a prior charge on earnings. When the 
company is all fed and satisfied the city gets the 
crumbs, if there are any. After all the com¬ 
pany’s “fixed charges” and huge preferentials 
have been paid, if there is any money left , the city 
is to get an equal share with that of the company 
on the money it furnished for the new lines. 
After the different funds have been paid and the 
various preferentials have been paid, including the 
city’s share, if there is still any money left, it is 
to be divided equally between the company and 
the city. Only supreme optimists should expect 
these divisible profits to come true. It is to be 
remembered that the lines and their finances are 
administered by the companies, in whose interest 


119 


THE GREAT COLLAPSE 

it is to manipulate it so that there will be no profit 
apparent. And so it has worked out. 

Under this agreement the company can easily 
swell the cost of operation, thereby precluding any 
possible revenue to the city; not even the interest 
on its bonds. Although the city is given the right 
to challenge any item of expense, that is no guar¬ 
antee against abuse, because a company powerful 
enough to make the city officials enter into such 
objectionable and unbeneficial contracts can easily 
silence other officials when silence is necessary. 

An instance, although in itself small, will illus¬ 
trate how expenses can be manipulated. About 
three months prior to the signing of the contract, 
when it was fairly certain that it would be signed, 
the salary of President Shonts was raised from 
$50,000 to $100,000 per annum, and the salary 
of Vice-President Hedley from $25,000 to $40,- 
000 per annum. The salaries were almost 
doubled, and yet, by reason of the new arrange¬ 
ment, the company did not lose anything thereby; 
on the contrary, it gained $5,000. Formerly the 
company spent $75,000 on the salaries of its 
president and vice-president. Now, with the city 
as partner, though the salaries were almost 
doubled, it pays only $70,000. By extending 


120 


THE GREAT COLLAPSE 


this method into all departments, the corporation 
can pile up a deficit on the city, then stoutly claim 
to be its warmest friend and demand higher fares 
in the interest of the city itself. 

The unsatisfied longings and forlorn hopes of 
the corporations in the past 20 years were an¬ 
swered fully in the contracts of 1913. For years 
the elevated railroad company tried hard to third- 
track their lines. This was denied by different 
administrations for different reasons. The day 
when the companies got what they wanted for a 
minimum consideration (to the city) came. The 
agreement gives the Interborough and the Brook¬ 
lyn Rapid Transit Companies the right to rebuild 
the old elevated lines wherever necessary and to 
third-track them. 

The new franchise for third-tracking is given 
for 83 years and is indeterminate after the first 10 
years. There is no compensation to the city for 
these franchises. The Chicago plan, which is by 
no means to be held out as a model, at least com¬ 
pelled the companies to yield their perpetual fran¬ 
chises before the agreement was entered into in 

1907. 

New York, with the experience of Chicago 
to go by, with the experience of Cleveland, which 


THE GREAT COLLAPSE 


121 


settled its transportation problem in 1907, with 
the experience of every European city to learn 
from, did not even secure this concession from the 
companies. The policy of the city seemed to be: 
A maximum of the city’s rights for a minimum 
consideration. 

There is another point in the contract bearing 
directly on the demand of fares. It is so strikingly 
unjust to the people that its acceptance by the city 
must have surpassed the fondest dreams of the 
corporations. That is true of both contracts, the 
New York and the Brooklyn. The enormous ex¬ 
pense involved in the reconstruction and improve- 
ment of existing elevated railroads is charged en¬ 
tirely to capital account, fully amortized within a 
period of 50 years, although the companies’ fran¬ 
chises are for 85 years. 

In other words, the fare-payers pay all costs, 
all the expenses, establish a fund to maintain the 
roads at the top-notch of efficiency, create an 
amortization fund which in 50 years will be large 
enough to buy out the entire reconstruction proj¬ 
ect, then had it over to the companies in per¬ 
petual possession. The public will cheerfully pay 
for the operation and maintenance of the road but 
it refuses, or rather should refuse, to buy a road 


122 


THE GREAT COLLAPSE 


for the company. The company blows hot and 
cold at the same time. It wants the fare-payers 
to buy an elevated railroad for it, at the same time 
it demands huge profits now, immediately. 

The New York Sun says the only way “to con¬ 
vert the average loss on every passenger carried,” 
—which is not true, by the way, as there is no 
average loss—“into an average gain” is to raise 
the fares. Even if there were an average loss 
there is a far better way of converting it into an 
average gain. Let all the unnecessary charges 
against the fare-payers be removed and the gain 
will be substantial. The 1913 contract fixes the 
fare at five cents. If the Sun believes the contract 
ought to be changed, it will be strongly supported. 
But the changes in the contract must not increase 
the burdens of the public. Advantage should be 
taken of this opportunity to release the city from 
the grip of the corporations. 

It is to be remembered that the agreement is 
not over-generous to the public in its fare pro¬ 
visions. While the Interborough Rapid Transit 
Company owns both systems, the subway and the 
elevated lines, two separate fares are charged, 
with no system of transfers, excepting at one un¬ 
important point. In this respect again we are be- 


THE GREAT COLLAPSE 


123 


hind other cities. Where transportation contracts 
are so general, as the one concluded in 1913, the 
one-city-one-fare principle has been established. 

The company takes no risk at all in this “part¬ 
nership.” Should the city find at some later date 
that certain extensions are necessary they will be 
built on the same “partnership basis.” But if 
there is a deficit in the enterprise the city is to 
sustain it. 

A great deal has been said about the recapture 
clause in the contract. The city’s right to recap¬ 
ture the new lines after the first ten years is an 
absurdity; while sounding excellently on paper in 
practice it is an impossibility. The new lines are 
intertwined inseparably with the old ones. The 
old lines cannot be recaptured. Of what value 
will the recapture of part of the system be? Each 
line will charge a separate fare. Little enthusiasm 
could be worked up for a municipal ownership 
that increases fares and inconveniences. The com¬ 
panies were fully aware of this practical difficulty 
when they consented to the “recapture” clause. 

It is the usual method in modern contracts be¬ 
tween corporations and a city to have a few al¬ 
luring and apparently beneficial provisions as a 


124 


THE GREAT COLLAPSE 


sop to the “mob,” then to vitiate their beneficial 
effects by the insertion of some insurmountable 
practical obstacle. 

The people are demanding formal promises 
rather than substantial relief. This is easily 
granted. The 1913 contract was supposed to 
have been a great compromise by inserting a clause 
giving the city the empty right to recapture the 
lines after the first ten years. The people were 
satisfied, the politicians chuckled, and the corpo¬ 
rations got away with it. 


Chapter X 

“DEAD CAPITAL” EARNING MONEY 

John Smith establishes a $2,000,000 business. 
John Smith is very greedy. He does not insure 
his business against fire. Insurance costs money. 
It is a charge against earnings, generally consid¬ 
ered a legitimate and necessary charge. But he 
wants to pocket all the earnings, which, by reason 
of a certain monopoly he enjoys, are substantial, 
$200,000 per annum. Ten per cent, is consid¬ 
ered a fair rate of profit and Smith is satisfied. 

A fire occurs. Smith’s business is half de¬ 
stroyed. He rebuilds it, placing it on the same 
footing as before. This costs $1,000,000. Smith 
figures his investment now $3,000,000. 

The business earns the usual $200,000. This 
time the rate of profit, according to the new capi¬ 
talization, is not very large—6.66 per cent. 

Smith refuses to profit by his experience. He 
fails to take those elementary precautions for the 
safety of his property which are considered indis¬ 
pensable by prudent business men. He again de¬ 
clines to insure the business against fire. Now 
there is an additional excuse for his action, his 
rate of profit is low. 


125 


126 


THE GREAT COLLAPSE 


In the course of a few years another fire occurs, 
more damaging than before. It practically de¬ 
stroys the entire plant. Unwilling to abandon his 
valuable monopoly, his special privilege, Smith 
sets out to rebuild his business. This time it costs 
$2,000,000. According to Smith, his investment 
is now $5,000,000. 

The business earns the usual $200,000 a year. 
The rate of interest, however, according to the 
new capitalization is decidedly low, only 4 per 
cent. 

Smith raises a howl. He cannot afford to sell 
his product as “cheap” as he did before; for he 
is losing money. A business earning only 4 per 
cent, profit on actual investment is a losing prop¬ 
osition. And Smith can prove with his books that 
he has actually invested $5,000,000. 

Is there a sane person who would say Smith is 
entitled to a raise in the price of his product? 
Who is there so naive as to contend that the pub¬ 
lic should compensate Smith for his ignorance and 
greed? If there be such a person he should be 
told that underneath the ashes of the “burnt capi¬ 
tal” there lies a $2,000,000 business still earning 
the high rate of profit of 10 per cent, and Smith 
should have no complaint. 


THE GREAT COLLAPSE 


127 


The railroad companies are in the position of 
Smith. They built their roads in the fifties and 
sixties, some of them earlier than that. By rea¬ 
son of the revolutionary changes in the arts, 
transportation machinery changed decade by dec¬ 
ade. Motive power alone has undergone three 
complete changes—animal, cable and electric. 
The nature of the cars and equipment had passed 
through many metamorphoses and there are still, 
no doubt, many it will pass in time to come. 

When the horse-car lines became obsolete and 
had to be abandoned, and cable roads established 
in their place, the companies simply issued new 
bonds or stock, as the case happened to be, to 
finance the change. The capitalization of the 
road, assuming no inflated issues, was the original 
cost of the horse-car lines, plus the additional 
money required to rebuild the lines into cable 
roads. When cars were badly worn, dilapidated 
and useless, the company bought new cars. It 
raised money for that purpose by issuing new 
stocks and bonds, thus adding more book value 
to the properties. 

When the cable roads became out of date and 
the lines were to be electrified, the companies 
again issued stocks and bonds to meet the expenses. 


128 


THE GREAT COLLAPSE 


This time the outlay was enormous because the 
cost of electric lines was comparatively high. 
Along with the change of motive power there are 
what may be termed incidental changes in cars, 
equipment, etc. The expenses to accomplish these 
changes were always met by the issuance of new 
stocks and bonds. 

The net result of all this is a book capitalization 
of the railroad properties far out of proportion to 
their actual physical value. 

It is obvious that when the people used a cable 
road they did not get more service out of it just 
because it was built on the grave of a horse-car 
line. When the traveler used a cable road he did 
not at the same time use a horse-car line. They 
should not, therefore, be expected to pay profits 
on two roads. 

Similarly, when people travel in an electric car 
they do not get more service out of it because it is 
founded on the outlived cable road. They surely 
do not get more service out of an electric line built 
on a street where a cable road operated formerly 
than they would if it were an original line built 
entirely new. Why, then, expect of them a fare 
that will suffice to pay interest and profits on the 


THE GREAT COLLAPSE 


129 


new capital, as well as the capital that had been 
invested on roads that have long ceased to exist? 

Yet the rate of fare has always been deter¬ 
mined on precisely such basis. And the demand 
now being made to raise fares is largely because 
the fare-payer is expected to pay interest and 
profits , not only on investments in lines upon which 
he travels, but also on investments on lines that 
have long ceased to exist 

Capital that was invested in the now dead and 
useless lines is dead capital; and dead capital can¬ 
not earn money. 

To reserve a sufficient portion of the revenue 
to replace capital consumed during the year, but 
not requiring replacement within the year, is a 
primary requisite and a conservative business prin¬ 
ciple. Such a replacement fund is considered part 
of the capital itself. To divide the entire annual 
surplus among the stockholders without first es¬ 
tablishing a proper replacement fund is equivalent 
to stealing a given sum annually from the capital 
itself and dividing it among the stockholders. Put 
that way, it is clear that the companies have been 
committing a criminal offense; hidden under a 
maze of business detail, the companies* practices 


130 


THE GREAT COLLAPSE 


are excused on the ground of “mistaken business 
judgment,” etc. 

If the companies, in violation of every business 
principle, following a policy of “get rich quick,” 
were too greedy to diminish their fat earnings by 
laying aside annually a fund for the purpose of 
meeting such obvious expenses as replacement of 
old, worn out, dilapidated and obsolete roads, and 
cost of equipment, should the people be taxed to 
compensate them for their greed? 

The companies knew that after a few years the 
old roads would have to be scrapped and replaced 
by new ones. They knew, as a matter of cer¬ 
tainty, that things used fall into disrepair. Why 
did they not prepare to meet these necessities, as 
prudent business men should? 

The case of Smith is less sinful. He gambled. 
There was as much chance for his business to es¬ 
cape the ravages of fire as not. But the railway 
companies knew that the destruction of their prop¬ 
erty was not a matter of accident but a matter of 
use and time. Yet they delibertely refused to 
insure their property by failing to establish an ade¬ 
quate replacement fund. 

Moreover, the profits of the companies in the 
early days were fabulous. During the period of 


THE GREAT COLLAPSE 


131 


horse-car operation the Third Avenue Company 
paid at one time as high as 23 per cent, dividends, 
the average being about 13 per cent. 

During the operation of the cable roads, there 
was already the dead weight of the horse-car lines 
attached to the new capitalization. Yet the earn¬ 
ings still appeared large. It is estimated by the 
Public Service Commission that “the company 
could have amortized or accumulated by sinking 
fund a sufficient amount to have paid off the en¬ 
tire cost of the road as set forth above, and still 
have paid dividends of over 8 per cent* and 
founded a reserve fund besides. ”f 

When the Third Avenue Company reorgan¬ 
ized, after its lines were in the hands of a receiver 
for over three years, it insisted upon capitalizing 
the dead roads. It issued securities for millions 
of dollars over and above the actual physical 
value of the property on the ground that the books 
showed that its constituent members, also in the 
hands of receivers, had invested that money in 
lines now extinct. This they did contrary to the 
commission’s warnings that the securities “far ex- 

* Italics are mine. 

f Third Avenue R. R. Co. Case No. 1181, 2 P. 3. C. 
Reports, p. 347. 



132 


THE GREAT COLLAPSE 


ceeded the value of the property and that the evi¬ 
dence as to net income did not indicate that inter¬ 
est and dividends would be earned upon the secur¬ 
ities proposed.”* 

“The statement is made as to the Third Ave¬ 
nue Railroad Company proper, that in the present 
book cost of road and equipment and in the lia¬ 
bilities which are outstanding, there is an amount 
about $2,000,000 for horse-car lines and equip¬ 
ment and about $8,000,000 for cable roads. 
These figures have not been proved, but whatever 
may be the amounts, the question is whether the 
new company should be allowed to issue securities 
that do not represent any property acquired or nec¬ 
essary expenses connected with such property.”f 

The capitalizing of “dead capital” so definitely 
established in the Third Avenue System is not 
without its examples in other companies. Among 
the colleagues of the Third Avenue company, in¬ 
dulging to excess in this vicious and deceptive 
practice, is the New York Railways system, now 
in the hands of a receiver, where it logically 
belongs. 

* Third Avenue R. R. Co. Case No. 1181, 3 P. S. C. 
Reports, p. 21. 

t Third Avenue Co. Case 1181, 2 P. S. C. Reports, p. 
347. 




THE GREAT COLLAPSE 


133 


It should be noted that these two companies 
between them control practically all the surface 
lines in Manhattan and the Bronx, as well as 
much of Westchester county. 

The New York Railways Company is the suc¬ 
cessor of the defunct Metropolitan Street Rail¬ 
way Company. Upon the latter’s reorganization, 
the Public Service Commission, in analyzing the 
securities about to be issued by the applicant’s 
reorganization committee, said: 

“77ie applicants submitted an estimate of prop¬ 
erty that had ceased to exist , amounting to over 
$13,355,000, apportioned as follows 


Horse-car system.$6,640,439 

Cable system. 5,371,698 

Compressed air equipment. 386,794 

Storage battery equipment. 956,714 


“The first item does not include all of the horse- 
car lines, only those that have disappeared entirely. 

‘7/ is unnecessary to discuss the accuracy of 
these estimates , for it is admitted that the prop¬ 
erty does not exist; . . .”*f 

* Italics are mine. 

f Re: Metropolitan Railway Company reorganization 
case 1305, 3 P. S. C. Reports, p. 113. 







134 


THE GREAT COLLAPSE 


Do the companies expect the “dead capital” to 
earn dividends? Shall the people pay on an in¬ 
vestment that does not exist? It may be of inter¬ 
est to have the companies explain whether these 
false capitalizations have anything to do with the 
present financial failures. 

About half of the capitalization of old roads 
consists of “dead capital” and investments never 
made. The companies insist that the people 
should be compelled to pay a fare high enough to 
pay dividends on this false capitalization. 


Chapter XI 


PUNISHING THE PUBLIC FOR ITS 
TOLERANCE 

AMORTIZATION THE MEANS 

During the great financial crash of 1907 almost 
all surface railway companies in New York went 
into the hands of receivers. When the atmosphere 
cleared, committees of bondholders for the benefit 
of whom the courts were administering the various 
properties, got together and decided to reorganize 
the business and set them up on a normal basis. 
They submitted their contemplated reorganization 
plans to the Public Service Commission, then 
young and inclined to be useful. 

The reorganized companies assumed all bonded 
indebtedness contracted in 20 years of reckless 
and criminal gambling. Prior to the collapse the 
railway companies were wild with speculation. 
The rails of the street cars were worth their weight 
in gold, as far as the debt and the interest it car¬ 
ried with it were concerned. 

“The funded debt of all the leased roads, apart 
from the Metropolitan Street Railway,” reports 
the Public Service Commission, “was increased 


135 


136 


THE GREAT COLLAPSE 


from $ 11,000,000 to $62,000,000. The bonded 
debt of the Metropolitan Street Railway Company 
was increased from $9,000,000 in 1897 to $44,- 
000,000 in 1907, although this company has but 
twenty-eight miles of electric tracks, so that the 
bonded debt per mile of electric trad? was $1,- 
500,000, nearly twice the cost per mile of track 
of constructing and equipping the present sub¬ 
way* In view of the condition existing it is not 
surprising that the system broke down and that 
receivers were appointed to take charge of various 
companies.”*}* 

Upon a careful inquiry of the proposed securi¬ 
ties to be issued by the reorganized companies and 
a liberal appraisal of the properties by experts, the 
Commission decided that the amount of securities 
proposed to be issued was far out of proportion 
to the real value of the property. 

In the Third Avenue system the total securities 
proposed to be issued amounted to $73,623,- 
744.32, while the physical value and assets of all 
the companies included in the reorganization 
scheme, liberally estimated, amounted to no more 
than $44,046,637.72. The excesses of securities 


* Italics are mine. 

f P. S. C. Reports, First District, 1909, p. 25. 



THE GREAT COLLAPSE 


137 


issued over the fair value of the property was 
nearly $30,000,000. Naturally, the Commission 
declined to permit the company to carry out its 
plan. Upon an appeal to the court the company 
secured a decision denying the Commission the 
right to limit the amount of securities to be issued 
by a reorganized company, even if the issue has 
no relation to the actual physical value of the 
property. 

A similar course was taken by the New York 
Railways Company. The total amount of se¬ 
curities it issued was $104,930,500 against prop¬ 
erties liberally estimated to be worth no more than 
$85,801,000. The excess of securities over lia¬ 
bilities here was $19,129,500, based upon the 
most liberal estimates. 

Having been directed by the courts to grant 
the applicants* request, the Commission turned 
from the futile and thankless task of defending 
the interests of the people to the more appreciative 
work of serving the property interests, the investing 
bankers, the insurance companies. In upper cir¬ 
cles there was universal approval of the Commis¬ 
sion’s action. At last it had found its proper 
sphere of activity and discovered its purpose for 
existence. 


138 


THE GREAT COLLAPSE 


At all expense, business must be made safe and 
sound—became the policy of the Commission. 
Securities once issued, whether they represent any 
property or not, should be amortized fully. 

Business should pay for itself. The aim of the 
science of modern finance is to make industry self- 
sustaining and devoid of risk. Public utilities are 
most amenable to such scientific financing because 
of their being subject to regulation by government 
bodies. Rates are raised and in some cases low¬ 
ered, depending on the ability of the utility to pay 
interest on its bonded indebtedness, maintain the 
various reserve funds, and pay a “fair” dividend. 

Should it appear that a public utility corpo¬ 
ration, conducting itself in accordance with the 
Commission’s prescribed rules of accountancy, 
doe not earn sufficient to show “fair” return on its 
investments, rates will be raised by the government 
and the people have no option but to pay as told. 

This is the situation to-day in the local railroad 
fare controversy. 

Amortization, a sound business principle in it¬ 
self, is now invoked by special privilege to shield 
its criminal work just as other sciences are often 
employed for vicious ends. 

The principle of amortization is simple enough. 


THE GREAT COLLAPSE 


139 


The management of the roads is to lay aside an¬ 
nually from earnings sufficient sums, separately 
kept, to provide for (1 ) depreciation, wear and 
tear and absolescence; (2) the redeeming of 
bonds when due; (3) general reserve; (4) in¬ 
terest on bonds; (3) guaranteed dividends. 

These are prime requisites. A corporation that 
cannot meet these obligations is bankrupt. The 
various sums requisite for each fund are deter¬ 
mined by experts in the employ of the Commission. 

The first fund is created to maintain the roads 
in first-class condition, to insure good and efficient 
service. It is also to be used for the purpose of 
meeting the ever-changing development in the arts, 
the introduction of new motive power, the replace¬ 
ment of wooden cars by steel cars, etc. That is 
the theory. 

The second fund is to be used for the purpose 
of retiring the bonds issued to raise money to de¬ 
fray the first cost of construction, the building and 
equipping of the roads. By means of this fund 
the business buys itself out in a stated period of 
time. 

The other funds are self-explanatory. 

There can be no objection to this principle of 
finance under the present business system, except 


140 


THE GREAT COLLAPSE 


when it is misapplied. The manner in which 
amortization has been practiced on the New York 
public is outrageous. 

To grasp fully the meaning of this in its rela¬ 
tion to the demand for higher fares, to appreciate 
the effrontery of the traction trust, and its unsound 
claims, it is necessary to examine briefly two 
questions. 

1. What is being amortized ? 

2. The railroads and equipments having been 
fully amortized, paid for, who comes into pos¬ 
session of them? 

In the first place, the investment in the surface 
railway systems amounting close to $300,000,000, 
is to be amortized fully out of the fare payers’ 
pockets within a period of about fifty years. The 
same government body prescribing the rule for 
amortization of bonds will also see to it that a 
fund is created to maintain the lines at top-notch 
efficiency. At the end of the fifty years or so, 
the private companies will come into possession of 
the street railway systems, all paid for. 

If the public is made to pay for roads, upon 
what principle should the companies come into 
possession of them? It is not clear upon what 


THE GREAT COLLAPSE 


141 


theory the government bases such policy, except 
possibly on the theory that it is the divine right of 
corporations to sit on the backs of the people 
forever. 

The third-tracking of the elevated lines is an¬ 
other case of giving something for nothing. The 
people amortize the cost of this expensive project 
within fifty years only to give the lines to the com¬ 
panies entirely unencumbered. This case has 
already been more fully discussed under the head 
of “The Notorious Partnerships.” 

If the tax annually placed upon the people for 
the purpose of buying property, by way of amor¬ 
tization, for private corporations is unjust and bur¬ 
densome, the amortization of all the accumulated 
“dead capital,” watered-stock and over-capital¬ 
ization generally, is outrageous. And acutally to 
demand higher fares for this purpose is, to put it 
mildly, highway robbery. 

The largest single item in the over-capitaliza¬ 
tion of the New York Railways Company’s reor¬ 
ganization scheme, it will be remembered, was 
“dead capital” amounting at the very least to 
$13,335,645. Speaking of the class of securities 
that must be amortized under its rules, the Com¬ 
mission said: “The mere statement of the prob- 


142 


THE GREAT COLLAPSE 


lem indicates that property which does not exist 
must he included in that class* If securities have 
been issued for such properties to the extent of 
$13,335,000, they certainly belong in the class to 
be amortized.” 

But who pockets all these vast sums of money 
that are being collected from the daily users of 
our transit lines under the guise of “amortization”? 
Who are these high lords to whom large feudal 
fees must be paid submissively and without a pro¬ 
test? Who are these figures dimly seen moving 
behind the curtains and wielding such a tremen¬ 
dous power over organized government, the press, 
and even the people? 

They are not the small stockholders. They 
are not the petty investors. They are the princes 
of high finance, in whose presence, we, the hum¬ 
ble people, stand with bared heads and trembling 
souls gladly offering our all. 

Investing bankers and insurance companies, 
generally, supply the money to the railroad com¬ 
panies. The bonds that are issued appear to bear 
3/4, 4 or 5 per cent, interest. One should not fall 
into the error of believing that this interest is all 


* Italics are mine. 



THE GREAT COLLAPSE 


143 


the financiers get. There are more subtle ways 
of receiving a usurious interest. The bankers sel¬ 
dom pay for bonds more than the actual physical 
value of property represented by them, regardless 
of their indicated value. When the time of re¬ 
deeming the bonds arrives, however, the investors 
receive not what they paid for the certificates, but 
what their face value indicates. 

Thus, when the Third Avenue Railroad Com¬ 
pany offered its bond issue, according to the bond¬ 
holder’s committee’s own statement, one class of 
bonds amounting to $15,790,000, was selling at 
about 80, another class of bonds to the amount of 
$22,536,000 was selling at about 70, while the 
$16,590,000 of stock was selling at 30. In other 
words, the banker pays $70 for a bond, draws 5 
per cent, interest on $100 annually, for 50 years, 
and in 1960 he returns the bond to the company 
receiving for it full value of $100. The fare- 
payer, therefore, pays to the banker, through a 
middle-man, the railroad company, a 5 per cent, 
interest for 50 years on $100, when only $70 
was borrowed, plus a special bonus of $30 upon 
the bonds’ redemption. 

Heretofore this bonus was not as secured as it 
is to-day, under government control. Now the 


144 


THE GREAT COLLAPSE 


government sees to it that the public puts aside 
enough money annually to amortize the bond at 
par, even though it was sold at 70. 

The total difference between the par value of 
the securities issued in the Third Avenue System 
and the actual value paid for them by the finan¬ 
ciers is approximately $25,000,000. This has 
gone to the bankers. 

In the New York Railways system $104,930,- 
500 bonds were marketed on a similar basis. 
Even so rich a company as the Interborough, when 
marketing its bonds allows a large bonus to the 
bankers. 

The net result of this is that the fare-payers are 
obliged to pay interest on tens of millions of dollars 
on money never borrowed, and also to amortize 
this gigantic sum to be paid to the financiers as a 
bonus when the bonds are redeemed. If a five- 
cent fare is not sufficient for all this an eight-cent 
fare will cover it. 

It is significant that the government, which is 
supposed to stand guard over the people’s interest, 
is directly instrumental, through the Public Serv¬ 
ice Commission, in collecting this money for the 
bankers and other investing interests. 

The amortization of many millions of dollars 


THE GREAT COLLAPSE 


145 


which were never invested is a new, scientific and 
legal way of picking the people’s pockets. 

The Railroad Securities Commission in its re¬ 
port to the President of the United States strongly 
urged that “no limitation should be placed on the 
price at which bonds can be sold, but any dis¬ 
count should be cancelled or amortized during the 
life of the bonds by the apportion each year out 
of annual income or surplus accumulated after the 
issue of the bonds of any less than the proportion¬ 
ate amount of the discount.*** 

The Public Service Commission agreed with 
the Securities Commission entirely. 

“It has been the invariable practice of the Com¬ 
mission to require the difference between the cash 
proceeds of the bonds and their par value to be 
treated the same as bank discount or interest paid 
in advance and to be amortized within the term of 
the obligation.* ** 

And it adds: “the propriety of this require¬ 
ment has never been contested by any of the cor¬ 
porations affected.”f 

Why should the corporations object? They 

* P. S. C. Reports, v. 3, p. 55. 

f P. S. C. Reports, v. 3, p. 56. 



146 


THE GREAT COLLAPSE 


lose nothing by it; on the contrary, they gain a 
great deal. The people, and not they, pay. 

When “no limitation” is placed on the price at 
which bonds can be sold, the financiers, through 
their bankers, buy bonds from their vassals, the 
railroad corporations, for a next-to-nothing price 
fully assured by the government that the bonds 
will be redeemed, at par, with moneys collected 
from the people, in annual installments, after a 
stated term of years. 

In the reorganization proceedings of the New 
York Railways system there appears an item of 
$4,740,000 under the head of “Franchise Pay¬ 
ments” against which securities were issued. This 
item is of extraordinary interest, not because of its 
amount, but as an illustration of the effrontery of 
the companies. Chapter VII deals with the 
methods employed by the companies in securing 
franchises. 

The companies stop at nothing. All means, 
fair and foul, are employed. If money has been 
spent, it has not been spent in paying the city for 
franchises, but in bribing the Aldermen and cor¬ 
rupting the government. The Public Service 
Commission says that “Although a careful inquiry 
was made, neither the applicants nor the experts of 


THE GREAT COLLAPSE 


147 


the commission have been able to find that any 
company existing, whose lines are now operated 
as a part of the system under discussion, has ever 
paid the city anything for franchise rights, except 
in two instances, totalling $150,000.”* 

There is only one theory upon which the com¬ 
pany can justify the capitalization of franchises at 
$4,740,000, for which only $150,000 were paid 
to the city. The people being too timid to demand 
a return of the stolen goods ought, in justice, be 
punished by making them pay all expenses in¬ 
curred in securing the theft, plus compound inter¬ 
est. And the penalty is inflicted with a vengeance. 
Not only is the traveling public to pay interest for 
the next 50 years on securities issued against these 
“Franchise Payments,” but also have it amortized, 
so that, in 1960, somebody will get $4,740,000, 
easy money. 

This generation is hard hit, as far as transporta¬ 
tion goes, for still another reason. The building 
of the new subways involved a tremendous layout. 

When the new subway contracts were being 
planned, the city was in no financial condition to 
build them itself or be an equal partner. Its total 

*Re: Metropolitan Street Railway, reorganization, 3, 
P. S. C. Reports, p. 113. 



148 


THE GREAT COLLAPSE 


debt was so huge that the constitutional limitation 
upon its borrowing capacity left a very narrow 
margin for further loans. 

The propertied classes, whose voices are usually 
heard in legislative halls, and who are the deter¬ 
mining factor in matters of public expense, found 
themselves between the devil and the deep sea. 
They were torn between two conflicting interests. 

A better system of transportation means a 
greater and more prosperous city. It means the 
rise in the value of real estate and higher rents. 
It means fat contracts for the construction com¬ 
panies, high interest to the investors, fat under¬ 
writing fees to the bankers, and large fees to pro¬ 
moters. In a word, it means prosperity to the 
money class. On the other hand, to issue mu¬ 
nicipal bonds for subway purposes may mean 
higher taxes with which to pay interest, and build 
a sinking fund for those bonds. There is little 
choice in such an embarrassing situation. 

It was finally agreed that the constitution be 
amended to increase the city’s power to incur in¬ 
debtedness for such public utilities as should prove 
self-supporting or profitable, as such debts would 
impose no burden on the taxpayer. 

The burden was shifted entirely from the tax- 


THE GREAT COLLAPSE 


149 


payer to the fare-payer, the public. Between the 
two the taxpayer wins, almost always. 

According to this constitutional amendment in 
which Governor Hughes, the Public Service Com¬ 
mission and most “civic bodies” concurred, the 
bonds issued for subway construction have to be 
fully amortized out of earnings, in order that this 
debt be considered one incurred in a self-support¬ 
ing industry. Interests on these bonds and all 
other charges, must be paid out of the same source 
and for the same reason. 

The contract between the city and the com¬ 
panies, therefore, provides that all bonds be amor¬ 
tized within 50 years, interest paid and every nec¬ 
essary expense borne by the traveling public. The 
fare must be large enough to cover all these 
charges; if it is not, the authorities can be depend¬ 
ent upon to see to it that it is. The companies* in¬ 
vestment is to be amortized within these 50 years, 
besides. 

The people are being humored into believing 
that they are getting subway systems and equip¬ 
ments free in 1965. The fact is they are to pay 
for the subways and equipment out of their fares. 
The company loses nothing. 

Of course, the amortization of so gigantic a 


150 


THE GREAT COLLAPSE 


sum as the 1913 contracts involve when added to 
the various unnecessary guaranteed profits in the 
form of rentals and just plain profits in the form 
of dividends, makes the burden upon the public 
exceptionally heavy. 

The fact is deliberately overlooked that the 
property holders of the city, not only as part of 
the general public, but as property holders, derive 
a special benefit from the Rapid Transit facilities. 
The cost of first construction should not, there¬ 
fore, fall entirely on the fare-payers. 

If the amortization of the costs of the subways 
exclusively out of earnings, under the present 
partnership is objectionable, if the amortization of 
the third-tracking project on the elevated lines and 
the actual physical value of the street railways 
systems is unjust to the public, the amortization 
of the watered-stock, “dead capital” and over- 
capitalization generally, exclusively out of earn¬ 
ings, is outrageous. 

There is but one excuse for making the people 
amortize everything in sight, that is, to save a tot¬ 
tering system. Gambling, speculation, appropria¬ 
tion of earnings that should have gone to maintain 
the business, criminal mismanagement—all these 
have brought the traction systems to ruin. The col- 


THE GREAT COLLAPSE 


151 


lapse was inevitable. Something had to be done 
to save the decayed system of private ownership. 
The business had to be rehabilitated, placed on a 
solid footing again. 

The Government, therefore, created a Public 
Service Commission. The courts hemmed and 
hedged in its power so that it might not wander 
into strange gardens and untrod paths. The Com¬ 
mission caught the “spirit in the air.” It proceeded 
to crystallize all the speculations, all the insane 
economic adventures, all the vices of an irrational 
system of private ownership of public utilities into 
funds to be amortized, paid for by the people, in 
installments, under the Commission’s own gentle 
guidance. 

This is what may rightly be called capitalism 
guaranteed by the government. 


Chapter XII 

THE BANKRUPTCY OF REGU^ 
LATION 

For a long time past two principles proposing 
to offer relief from the unspeakable abuses of 
private ownership of public utilities have been 
battling for supremacy. One principle is that of 
public ownership and operation; the other is that 
of private ownership, subject to public regulation. 

Each principle has enlisted for its support a 
great mass of people of varied political opinions 
and of various degrees of advocacy. 

Both movements have conceded that something 
must be done. Things could not go on as they 
were. The constantly growing evil was too great 
and too menacing to permit of indifference. 

The collectivists, as the believers in public 
ownership are called, range from the out-and-out 
Socialists, who believe that all socially necessary 
industries should be collectively owned and demo- 
mratically managed, to the mere municipal owner¬ 
ship reformers, who hold that only what can be 
conservatively defined as public utilities—such as 
water supply, gas plants, railways and the like— 


152 


THE GREAT COLLAPSE 


153 


should be owned by the Government, while the 
rest of the industries can best be taken care of 
by private ownership and management. 

The regulationists, likewise, are of varied de¬ 
gree. They differ on what should be subject to 
regulation and on the extent to which the policy of 
government interference in private affairs should 
be permitted. 

The principle of regulation won. It won be¬ 
cause it received support from all sorts of elements. 
It made its appeal to that portion of the popula¬ 
tion which honestly believe that the evils of private 
ownership can be alleviated and social progress 
best served by constant governmental guidance and 
watch over the wicked corporations and the frail¬ 
ties of human nature. It made its appeal to the 
great mass of frightened mediocrity who saw in 
collective ownership the advent of the horrible 
“red.” It made its appeal to the cunning apolo¬ 
gists of special interests who saw in regulation a 
means of diverting popular attention and preserv¬ 
ing the present system. 

Though carrying the day and in possession of 
full power to follow their ideas, the regulationists 
soon realized the hollowness of their victory. To 
be in possession of power is not sufficient. It is 


154 


THE GREAT COLLAPSE 


more important to so use that power as to insure 
its retention. 

This they could not do because they were not 
certain of their ground. They chose to attach 
strings and limitations to their triumph. There 
was a feeling that their solution was temporary 
and insufficient. It could not stand the test of 
time. 

The theory of regulation, briefly put, is this: 
Public utilities are indispensable public needs. 
Their private ownership and control results in 
certain abuses and evils. Private owners cannot 
be relied upon to serve the public disinterestedly. 
Stipulations in contracts or in franchise grants are 
no guarantee that the safety and convenience of 
the public is assured, because what may be an 
ample safeguard at the time relations are entered 
into may prove a menace and a fetter years later, 
conditions of the community change and with al¬ 
tered conditions arise new and different require¬ 
ments. A rigid contract is entirely inconsistent 
with the interests of an ever-changing and growing 
society. 

Therefore, a group of wise and trustworthy men 
are to be appointed by the Governor, “by and with 
the advice and consent of the Senate,” for a term 


THE GREAT COLLAPSE 


155 


of five years to be the direct agents of the public 
in its dealings with public utility corporations. 
These Commissioners should be experts in the ex¬ 
tremely complex problems of public utilities. 
They are given sweeping power to hear, investi¬ 
gate and pass upon complaints against public utility 
corporations, to prescribe rules for the proper con¬ 
duct of the business, and decide upon rates to be 
charged to the public. 

The Commission is to be on guard constantly. 
With every change in the life and development 
of the community it is to prescribe such rules and 
regulations as to meet with its new needs and 
requirements. 

It should be noted, incidently, that the theory 
of regulation is contrary to our system of govern¬ 
ment based, as it is, on the system of checks and 
balances. The Commission is the incarnation of 
all three functions, legislative, judicial and admin¬ 
istrative. It is what may be designated as gov¬ 
ernment by commission. 

This inconsistency explains the many conflicts 
between the courts and the Commission in its 
early days. Regulation carried to its logical con¬ 
clusion is decidedly out of harmony with the recog¬ 
nized rights of “vested interests.” 


156 


THE GREAT COLLAPSE 


If regulation is reared on a contradiction in 
theory, it is beset with insurmountable difficulties 
in practice. 

A sincere desire to be good, to observe the rules 
of the game, and to demand that others be and do 
likewise, may be sound and lofty idealism, but it 
will not secure the ends sought, unless there is, side 
by side with good intentions, a practical program 
removing the material conditions which make it 
easier and more profitable for men to do evil than 
to do good. 

The regulationists failed because they did not 
have a practical program. They did not base 
their theories upon fact. They did not take into 
account the interplay of political and economic 
interests under a system of private ownership. 
They did not recognize the fact that corporations 
control governors and legislatures and, therefore, 
they can easily control commissions, which are the 
mere appointees of these public officials. They 
did not comprehend that the more corporation 
interests will depend on the direct say-so of public 
agents, the more reason there is for the corpora¬ 
tions to exert their almost irresistible power to 
secure governors and commissions who are sub¬ 
servient to their will. 


THE GREAT COLLAPSE 


157 


Regulation in practice, therefore, not only fails 
to purify the economic lake, but aggravates the 
situation by polluting the political waters. 

Although in a vague and indefinite way New 
York had regulatory bodies for many years past, 
the beginning of regulation in the modern sense 
in this city and state dates back to 1907. 

The Public Service Commission, appointed 
under the complicated Public Service Commis¬ 
sion’s law, divides the state into two Districts. 
The First District operates in Greater New York; 
it represents the city in its dealings with the public 
utility corporations, except the railroads running 
out of the city, and the telephones and telegraphs. 
The salaries of the five commissioners, as origi¬ 
nally organized, are $15,000 per annum; their 
secretary and counsel are paid by the state, while 
the rest of the expense is a mandatory charge on 
the municipality. 

Governor Hughes, the sponsor of the commis¬ 
sion idea in this state, recklessly trampled on every 
principle of municipal home rule in forcing the 
commission upon the city. 

The Commission for the Second District oper¬ 
ates in the rest of the state and covers telegraphs 


158 


THE GREAT COLLAPSE 


and telephones for the city, as well as those rail¬ 
roads that terminate in New York. As far as 
regulation is concerned both districts possess simi¬ 
lar powers. 

The people’s experience with the Commission 
is sad and disappointing. The Commissioners’ 
incompetence and unwillingness to represent the 
people exceeded the forecasts of the worst regu¬ 
lation opponents. 

The Commissions have kow-towed to the corpo¬ 
rations from the very beginning. Their members 
were either former employees of the corporations 
they were set to regulate or they enjoyed lively 
expectations and perhaps promises to be “picked 
off’’ when their arduous tasks as commissioners 
were over, or they were so incompetent and in¬ 
different to their duties that their handling of their 
duty bordered on the grotesque. Occasionally a 
member of ability and character would find his 
way on the Commission. But he would be con¬ 
tinually out-voted, and if he made too much noise 
he would be dropped. 

When the Hon. John A. Dix, the Murphy 
Governor, had to fill a vacancy on the Commis¬ 
sion, he appointed George V. S. Williams, a 
Brooklyn lawyer, who some years previously 


THE GREAT COLLAPSE 


159 


had been connected with the legal staff of the 
Brooklyn Rapid Transit Company. He, of 
course, showed healthy signs of appreciation of 
his former employers* interests and generally lined 
up on all questions on the side of the corporations. 
He was a strong supporter of the notorious 1913 
contracts. 

William R. Willcox, chairman of the New 
York Commission from the day of its creation 
to February 1, 1913, upon his retirement from 
duty, was “picked off” by the Hudson and Man¬ 
hattan Railroad Company, a corporation Mr. 
Willcox was supposed to have been regulating 
for about six years, and he was made its coun¬ 
sel in a capitalization case before the Commission. 
The New York Edison Company, a subsidiary 
of the Consolidated Gas Company, also appre¬ 
ciated the value of having a former chairman of 
the Commission appear as its counsel before his 
former associates, and so it retained Mr. Willcox 
in a big rate case. 

Frank W. Stevens was the chairman of the 
upstate Commission. His ability was soon recog¬ 
nized by the corporations appearing before him. 
No talent is too brilliant or too costly for the 
vested interests if it can only be purchased and 


160 


THE GREAT COLLAPSE 


enlisted in its defense. Before Mr. Stevens, upon 
being retired to private life, had time to shed a tear 
over his retirement, the New York Central Rail¬ 
road Company retained him as its general counsel. 

That the public utility corporations have been 
taking their attorneys preferably from among for¬ 
mer commissioners is not to be wondered at. It 
is understood that they do not employ the com¬ 
missioner, but the attorney; he having been well 
trained, of course, at public expense. If, when this 
attorney comes before the Commission in a rate or 
capitalization case, he adds to the weight of his 
legal talent his influence with his former associates 
and wins a point, it is his privilege. The corpora¬ 
tions see in it a mere coincidence. Only evil 
minds will criticise such innocent transactions. 

Again, who will forget the famous appoint¬ 
ment to the chairmanship of the First District Com¬ 
mission of the Honorable Edward E. McCall, 
Tammany darling, chum of Murphy, and inter¬ 
ested party in the Kings County Electric Light 
and Power Company, a powerful corporation in 
Brooklyn that he was set to regulate. As was 
later learned, this man was appointed by the hon¬ 
orable and valiant William Sulzer, the “People’s 
Governor,’’ at the behest of Murphy. 


THE GREAT COLLAPSE 


161 


McCall as a regulator not only by reason of 
his personal interest in certain public utility cor¬ 
porations, but by general training and environ¬ 
ment, typifies in his person the bankruptcy of the 
entire regulation policy. 

The Public Service Commission became the 
football of politics. With every change of ad¬ 
ministration at Albany there has been an upheaval 
in the Commission. The Governor has the right 
to remove commissioners for cause. Invariably, 
the Governor has sufficient ground for removal 
if he so chose. When the statesmanly Dix be¬ 
came governor the Commission was investigated. 
When Whitman, Republican, presidential aspi¬ 
rant, reigned there was an investigation and some 
removals. Now, when Mr. Smith, Democrat, is 
in power the usual investigation is proposed.* 

The net result of the twelve years of the Public 
Service Commission’s life is a shameful surrender 
of the city’s interests. A system of subways. 


* Since this chapter was written the Commission for 
the First District has been reorganized. At the sug¬ 
gestion of the Governor, the Commission now consists 
of one. Lewis Nixon was appointed. He is spared the 
inconvenience of having minority reports. He is unani¬ 
mous on all questions. 



162 


THE GREAT COLLAPSE 


financed by the city, maintained and amortized 
by the public, has been tenderly handed over to 
private corporations by the Commission for a 
period of 50 years, to reap hundreds of million of 
dollars in profits. It bartered away the valuable 
right in the elevated third-tracking franchise with¬ 
out any consideration; and, moreover, it pledged 
the public to buy out the roads for the corporations. 
It has not reduced rates. It has not improved 
service commensurate with the expense and sacri¬ 
fice the city has been making. It has not im¬ 
proved the safety of the traveling public. It has 
not improved the conditions of the workers em¬ 
ployed on the lines. It has long ceased to regu¬ 
late the corporations in the interest of the public 
and has very effectively regulated the public in 
the interest of the corporations. Its function has 
been reduced to guaranteeing and protecting cor¬ 
poration investments, proper or improper. 

The Public Service Commission is one with 
the corporation according to a bill recently in¬ 
troduced by Assemblyman Martin of Oneida 
County, the purpose of which is the raising of 
fares to 7 or 8 cents. The Commission filed an 
extensive brief with the Legislative Committee to 


THE GREAT COLLAPSE 


163 


which the bill was referred, giving reason why the 
bill should become a law. 

Instead of the corporation engaging highly paid 
counsel to argue and push its legislation, the 
Commission receiving its pay from the people 
does it ungrudgingly. Its services are so much 
more valuable to the corporations because the 
Commission is clothed with government authority. 
Its arguments and pleas are weightier than those 
of private counsel by reason of the mistaken view 
that it represents the people. 

Here is another case where a reform, sponsored 
by a movement whose general purpose is to save 
the present system, ultimately becomes a weapon 
in the hands of the capitalist class. 

The policy of regulations has failed, and failed 
badly. 

One of the signs—if not conclusive, at least 
indicative—showing that regulation failed, that 
the Commission is the bulwark of the public 
utility corporations, that it is of no value to the 
people, is the anxiety of the corporations to make 
the Commission a permanent body, the existence 
of which would be guaranteed by the Consti¬ 
tution. 

Mr. Willcox, who cannot be accused of being 


164 


THE GREAT COLLAPSE 


unfriendly to the entrenched powers generally and 
public utility corporations particularly, strongly 
urged before the Constitutional Convention of 
1915 that the Commission be made a constitu¬ 
tional body; its term to be 10 years. 

Honest regulationists are now convinced that 
regulation as a permanent policy is a failure, 
others have been compelled to “see” it. Experi¬ 
ence is the best teacher; and the costly experience 
of regulation has taught the people its futility. 

Spurred by the failure of their opponents and 
superbly confident in the soundness of their prin¬ 
ciple, the collectivists are forging ahead. Their 
adherents are becoming more and more numerous. 
The movement is irresistible. 

The regulationists realize their diminishing 
strength and have started a policy of compromise. 
They have taken for themselves the present and 
frankly assign the future to the collectivists. They 
have confessed the impotence of their scheme. 

All franchises granted, all contracts entered 
into between the city and the railway companies 
bear testimony to these compromises. The 1913 
contracts are extremely bulky, covering the rela¬ 
tions between the parties in great detail. But 
this is the very thing the theory of regulation is 


THE GREAT COLLAPSE 


165 


supposed to avoid. It was intended to do away 
with rigid agreements. 

Throughout the contract runs the confession of 
the inevitability of public ownership. There is 
the acknowledgment that the future belongs to 
the collectivists. The great bulk of the contract 
is taken up with various details insuring the in¬ 
terest of the corporations in case the people get 
impatient and demand the subways before 1965. 
The possibility of such a demand was considered 
imminent, not later than ten pears after the be¬ 
ginning of operations. The recapture provisions, 
though made impotent by the various conditions 
smuggled into the contracts by the corporations 
are, nevertheless, indications to what extent the 
pressure of public opinion compelled the corpora¬ 
tion controlled public officials to bow to the col¬ 
lectivists. 

Private ownership of public utilities having 
failed, the policy of regulation having failed, 
public ownership and operation being inevitable, 
what kind of public ownership shall it be? 


Chapter XIII 


MUNICIPAL OWNERSHIP WE DO 
NOT WANT 

All roads seem to lead to public ownership. 

It is only a matter of time when ownership and 
operation of public utilities by the government will 
be considered as commonplace as government 
ownership of the post-office, the schools, the fire 
departments, the parks, the bridges, the streets and 
the water supply, is looked upon to-day. 

Besides the Socialist party, which in its larger 
program includes municipal ownership, one of 
the old parties, the Democratic party, in this city 
and state is committed to municipal ownership. 

“Specifically,” says the Democratic city plat¬ 
form for 1917, “we are in favor of public owner¬ 
ship and operation of all public utilities, including 
tractions, gas, electricity and the telephone.” Mr. 
Hylan, Democratic candidate for Mayor, laid 
great stress on this plank in his campaign. 

In 1918, when Tammany again assumed con¬ 
trol of the city, Senator Wagner, minority leader 
in the upper house in Albany, introduced a muni¬ 
cipal ownership bill giving the cities power, among 


166 


THE GREAT COLLAPSE 


16 7 


other things, to build or acquire by purchase or 
condemnation their transportation facilities and 
operate them directly, if they chose. The bill 
was killed in committee. 

In the 1918 elections the Democrats won the 
governorship, but failed to increase their strength 
in the Legislature to any appreciable extent. 

In addition to the flood of municipal ownership 
bills introduced in the 1919 Legislature by mem¬ 
bers of all parties, Senator Foley and Assembly- 
man Donohue, minority leaders of the Senate and 
Assembly respectively, introduced two enabling 
acts, which are in principle the same as those 
sponsored by their party the year previous. 

One of the bills, Assembly Bill Int. No. 1102, 
1919, short and to the point, ends by saying: 
“When such determination shall have been so 
made and approved it shall be unnecessary, any¬ 
thing in this act to the contrary notwithstanding, 
to obtain the approval, consent or authority of 
any other body or board pursuant to the pro¬ 
visions of any law, general or special.” 

This is meant for the benefit of the Public 
Service Commission. Tammany, considering it¬ 
self the destined ruler of the City of New York. 


168 


THE GREAT COLLAPSE 


resents interference by the Commission, a state 
body, and usually Republican into the bargain. 

Many Republicans, though frankly opposed to 
municipal ownership, are seriously desirous of 
passing such bills. They are of the opinion that 
the passage of the bills would only embarrass the 
Tammany administration. They do not believe 
their opponents are prepared to go through with 
the municipal ownership program. They hold, 
and there is color to such view, that the real 
reason for Tammany’s insistence on municipal 
ownership is the opposition to it by the Republi¬ 
cans. Since the political game demands an 
“issue,” Tammany is quite willing to make muni¬ 
cipal ownership “the issue.” 

This seems to be true, because in cases where 
the city administration did have the power and 
the opportunity to redeem its campaign promises it 
failed to do so. The Tammany-public-ownership 
worthies at the mere sight of a chance to enact 
a public ownership ordinance drew their heads 
into their private-ownership, corporations-ridden 
shells. 

“On February 28, the Socialist Aldermanic 
delegation, through Aldermen Vladeck, Held 


THE GREAT COLLAPSE 


169 


and Wolff, introduced an ordinance providing for 
the operation by the City of New York of pas¬ 
senger and other car service over the Williams- 
burgh Bridge. 

“When the Socialists introduced their ordi¬ 
nance the company was operating under a permit 
which was to expire on March 31, 1918—this 
permit has since been extended six months—when, 
it was expected, a new contractual arrangement 
would be entered into between the company and 
the city. 

“The ordinance was intended to prevent this 
by municipalizing the line. . . . 

“It was pointed out by the Socialists that the 
company had been realizing a net annual profit of 
approximately 100 per cent, on an original capi¬ 
talization in 1904, when it was organized, of 
$100,000. Its net corporate income for the fiscal 
year ending June 30, 1917, according to the 
company’s own balance sheet, was $92,742.24. 

“The Socialists further pointed out that the 
bridge, the tracks on the bridge, the wiring and 
terminals, were—and are—the property of the 
city. 

“Here was—and still is—an opportunity for 


170 


THE GREAT COLLAPSE 


the administration elected on a municipal owner¬ 
ship platform to prove its sincerity.”* 

The ordinance was emphatically voted down. 
The Bridge Operating Company received another 
extension. 

This action casts serious suspicion on the sin¬ 
cerity of the Democrats. In the light of these 
facts, their loud demands for “permission” from 
the Republican Legislature to enact municipal 
ownership is almost as impressive as the frantic 
demands of “Let me go!” made on a friend by 
a man drawn into a fight, who, at heart, is too 
cowardly to go through with it, but must put up 
an appearance and “make a showing.” 

When a party in power, with no commendable 
past in its favor, refuses to put into practice defi¬ 
nite campaign promises—and what it still pretends 
to strive for where it is prohibited by law—upon 
an occasion such as was presented to it by the 
expiration of the Bridge Company contract, an 
occasion most favorable to the city, it is well to 
be on guard before endorsing its kind of municipal 
ownership. 

Perhaps the desire of certain railroad corpora- 

* The Socialists in the Board of Aldermen, by E. 
Clark and C. Solomon, pp. 16, 17. 



THE GREAT COLLAPSE 


171 


tions to get rid of some old, dilapidated and un¬ 
profitable lines, or some such consideration, would 
move the city administration to live up to its 
campaign promises. Such practices would be 
neither new nor striking. 

When Mr. Gaynor, who (for a Tammany 
candidate) was exceptionally intelligent and sin¬ 
cere, ran for Mayor, in 1909, his classic speeches 
were largely able exposes of the 1900 and 1902 
subway steals, and solemn promises to save the 
city from similar transactions. 

“And now,” said Mr. Gaynor, in a speech 
delivered in Tammany Hall, on October 19, 
1909, “if I may get away from my notes, I will 
say just a few words in regard to some of the 
important issues of the campaign. My friends, 
we are going to build subways, for the city is 
going to build subways. We do not intend that 
a single subway franchise for it shall be passed 
over to those men who erected your street rail¬ 
ways over here to have bonds and stocks sold out 
to the community on the highest figures, and then 
the road thrown into bankruptcy, the same as 
your roads are over here to-night, and have been 
for three years, not a dividend paid on them 
meanwhile. 


172 


THE GREAT COLLAPSE 


“Oh, you men of Manhattan! I fear you do 
not always know what is occurring right among 
you—the most scandalous chapter in the history 
of New York, and it has evoked very little public 
indignation. The men that did it are said to be 
good men. They hold their heads high. . . . 

“Nobody ever put a dollar into the building of 
the present subways except the city; nevertheless, 
the day it was opened and you met to celebrate 
the opening of it, how many people in the city of 
New York stopped to think that, although they 
had put every dollar into it, they did not own it 
when it was completed, but that those who got 
into it have it for 75 years, before it comes back 
to the City of New York. 

“/ can tell you that during the next four years 
we will build the subways for the city and none 
of those people will so much as get their little 
finger into it.” 

This is a fair sample of the kind of campaign 
speeches and promises made by candidate Gay- 
nor. No doubt this issue as much as any other 
was responsible for his election. 

The people had a right to expect public owner¬ 
ship of the contemplated subways. They had 


THE GREAT COLLAPSE 


173 


a right to expect that the subways would be built 
“for the city.” 

What actually happened has already been told. 
“Those people” not only got “their little finger 
into it,” but their whole hand. In spite of his 
pledges and promises, in spite of the tremendous 
“public indignation” it has evoked, the same 
Mayor Gay nor entered into the 1913 contracts, 
which not only surrendered the subways that were 
to be built but have amplified and guaranteed the 
robberies of the first and second contracts which 
he so eloquently attacked. 

If the public ownership of Hylan is to be no 
better than that of his, in many respects, much 
worthier predecessor, the people will be thankful 
to him if he leaves matters as they are. 

It often happens that sincere advocates of 
certain reforms most actively oppose these reforms 
when introduced with a view of strengthening the 
very interests they are designed to combat. The 
German Social-Democrats, champions of social 
ownership of the means of life, were the strongest 
opponents of certain government monopolies. 
They opposed Bismarck when he sought to create 
a tobacco monopoly. They opposed Kaunitz in 
his wheat monopoly project. They opposed the 


174 


THE GREAT COLLAPSE 


transformation of the Reichsbank into a govern¬ 
ment bank. The opposition was based squarely 
on the ground that it would strengthen the arm 
of the ruling class, the junker and capitalist ele¬ 
ments, and would furnish them with facilities for 
more intense spoliation. 

The Socialists in this city, the foremost advo¬ 
cates of public ownership, may be faced with the 
unpleasant task of opposing public ownership a la 
T ammany. 

Several questions will have to be carefully ex¬ 
amined before public ownership, proposed by the 
believers in the established order, is indorsed by 
the working class generally and the Socialists in 
particular. 

1. Will the city take over only those lines it 
deems necessary? Or will it acquire all lines, 
taking the fat along with the lean? Or will it 
take the lean and leave the fat to the corpora¬ 
tions? 

2. If the city takes over the entire system, will 
it lease some lines to operating companies and 
operate others directly, or will it operate all lines 
as a unit, as one system? 


THE GREAT COLLAPSE 


1 75 


3. Upon what basis does the city expect to 
acquire these lines? 

4. How will the workers employed on the city- 
owned lines be protected? Will they be in no 
better circumstances than other city employees? 

The questions under the first head are impor¬ 
tant because the city will need to raise a gigantic 
sum of money for which no preparation is being 
made by those in authority. If the entire trans¬ 
portation system is not acquired, support of public 
ownership will depend, among other things, on 
the particular lines the administration seeks to 
acquire. Even if the city is to take over the entire 
transportation system care must be taken that this 
move is not used as a cloak to relieve the com¬ 
panies of many useless and profitless lines. There 
are some lines that cannot be properly placed in 
a local transportation system. 

The second question is of moment because 
every bill now pending in the Legislature giving 
the cities power to acquire public utilities ex¬ 
pressly empowers them to lease these properties. 
If the sponsors of the bills really mean to embark 
upon a policy of public ownership, and extend it 
to all fields where private ownership proves un- 
beneficial, they would not seek a right to do that 


176 


THE GREAT COLLAPSE 


which has so shamefully been employed for the 
past 20 years as a means of robbing the city. 
The subways in New York are “leased” to the 
Interborough and the B. R. T. The people 
had enough of “leases.” 

The kind of public ownership that would have 
for its purpose the mere changing of lessors in¬ 
stead of abolishing them altogether should not 
receive the support of true advocates of public 
ownership. Here, again, the motives and future 
plans of the old party public-ownership politicians 
must be studied. 

For many reasons the third question is the 
most complex. Constitutional property rights, the 
science of finance, the honesty of the appraisers, 
the interference of the courts, the shrewdness of 
the corporations, the breadth of vision and public 
faithfulness of the administration are some of the 
essential elements involved. 

Excepting the provisions in the various bills 
giving power to the cities to acquire the properties 
by “purchase and condemnation,” the proponents 
of government ownership have not clearly indi¬ 
cated upon what financial basis they will acquire 
the roads. 

Senator Newlands, speaking before the joint 


THE GREAT COLLAPSE 


177 


committees on Interstate and Foreign Commerce 
of the Congress of the United States, November 
20, 1916, gave an intimation of the plan in view 
for acquiring privately owned railroads by the 
government. 

“The plan of acquiring national ownership,” 
said Senator Newlands, “would not be difficult. 
It would not involve the entire readjustment of 
the present system. It would be easy to authorize 
the Interstate Commerce Commission to institute 
suit and condemn the shares of stock of railroads 
in the country engaged in interstate commerce, 
leaving the bonds outstanding as a lien upon the 
property. Thus the interests of the stockholders 
would be purchased by the nation and the Inter¬ 
state Commerce Commission could step into the 
position of director of the various corporations, 
with their present organization of officials and 
employees, and could gradually work out a 
method of national administration.” 

Thus, the acquiring of property by condemna¬ 
tion under the present complex relations of cor¬ 
porate industry is nothing more than the con¬ 
demnation of worthless stock, the assumption of 
obligations to pay interests on, and redeem, when 
due, the entire outstanding bonded indebtedness. 


178 


THE GREAT COLLAPSE 


It should be borne in mind that the railroad 
properties in this city are mortgaged several times 
their worth. No matter how little the government 
may pay for the stock, and even if it be acquired 
without cost, the government would still be noth¬ 
ing more than the collecting agent for the capi¬ 
talists. It would collect the mighty tribute capi¬ 
tal has levied upon the people. It is doubtful 
whether high finance, unless it refrains for political 
reasons, will not become the staunchest supporter 
of this kind of government ownership. The 
bankers would much rather have the government 
as their debtor than private companies. 

In stepping into the shoes of the private com¬ 
panies, the Government, as debtor, would have 
to pay a high interest and heavy bonus to which 
the bankrupt corporations bound themselves in 
their worst days of financial helplessness. The 
Government would also have to pay interest on, 
and redeem, the bonds issued against “dead capi¬ 
tal,” and such other debts. 

Although government ownership under these 
conditions would eliminate millions of dollars 
paid in dividends, still, it is doubtful whether 
the responsibilities of guaranteeing bad debts, 
badly incurred, running into hundreds of millions 


THE GREAT COLLAPSE 


179 


of dollars, is worth the gain. Looking at it from 
a class point of view, the capitalist class would 
gladly give up dividends, consider them as a sort 
of premium, paid annually to the Government, 
for insuring its actual and alleged bonded invest¬ 
ments. 

Such seems to be the government ownership 
about to be inaugurated by those who believe in 
the preservation of the present system. 

Three questions must here be answered: 

1. Will this kind of government ownership be 
an improvement, financially, upon present condi¬ 
tions? Not to any appreciable extent. 

2. Will such kind of government ownership 
be conducive to the movement seeking to trans¬ 
form society “by degrees” from capitalism to 
Socialism? Indeed not. 

3. Can advocates of public ownership, with 
a view of extending its principle to other 
socially necessary industries leading to the elimi¬ 
nation of the capitalist system, support such gov¬ 
ernment ownership? Hardly. 

The assumption by the Government, in Decem¬ 
ber, 1917, of the great railroad system of the 
country with its 260,000 miles of railways, its 


180 


THE GREAT COLLAPSE 


1,000,600 employees, and its investment of $17,- 
500,000,000, might have proven the greatest argu¬ 
ment in favor of permanent public ownership of 
railroads and its extension to other public utilities 
if not for the financial losses suffered by the Gov¬ 
ernment in spite of the decided raise in rates. The 
public is not aware, of course, that these losses are 
largely due to the high tribute paid to the private 
owners under the contract. 

A concrete case like this serves as an excellent 
weapon in the hands of reactionaries who readily 
take advantage of the balance sheet to prove the 
“failure” of public ownership, and particularly 
public operation. 

For the genuine supporters of the public owner¬ 
ship idea to try to explain this failure is good labor 
lost. Public ownership must prove successful if 
it is to serve as an example to those who want 
“to be shown.” If it has not this value, then 
private ownership should be preferred until such 
time as the real thing—not the millennium but just 
real public ownership—can be introduced. 

Thousands of working men and women will 
not support public ownership until the fourth 
question is answered, and answered properly. 


THE GREAT COLLAPSE 


181 


The experience of workers in the employ of 
the government is most disappointing. Rights 
they enjoy in private employ are denied them 
when they are similarly employed by the govern¬ 
ment. The Federal employees are forbidden to 
exercise their fundamental rights as citizens. 
They are forbidden to engage in political activi¬ 
ties, a right which private employers would not 
dare to take away openly. They are generally 
denied the right to organize, and when permitted 
that, they are strictly forbidden to strike. 

In the government employ, as we have it now, 
the worker is paralyzed. His weapons are taken 
away. His only means of redressing his griev¬ 
ances is the petition. This he refuses. He has 
acquired enough self-respect to know not to crawl 
and beg when he can demand and get. 

Thus far, who is less free than the government 
employee? Against the government it is almost 
impossible to struggle, much less to win. 

With the private employer the workers have a 
better opportunity to win. His comparatively 
limited economic resources, fear of bankruptcy, 
and a desire not to get “in bad” with the public 
often make him concede to the workers* demands. 
If the industry is well organized both contestants 


182 


THE GREAT COLLAPSE 


have an even chance. The great mass of people, 
conveniently designated as “the public,” is a 
neutral party and, of late, is even inclined to favor 
the cause of labor. 

Such is not the case when the workers face the 
government. On strike, they are branded as 
traitors. They are confronted by the unconquer¬ 
able economic strength, as well as the formidably 
organized physical and moral power of the gov¬ 
ernment. 

The open shop, in government industry, is re¬ 
inforced with the open jail. 

The workers remember the street cleaners* 
strike in this city several years ago, and the atti¬ 
tude assumed by the municipality at that time. 
Nor do they forget the action of the Government 
in the truck-drivers’ struggle against a private em¬ 
ployer who happened to carry United States mail, 
a federal government industry. 

In these struggles, the state assumed the atti¬ 
tude of defender of organized society. It as¬ 
serted its authority as a police-state when, as a 
matter of fact, the workers were striking not 
against the police-state, the state, defender of 
public peace and order, but against the state as 
employer of labor, the state as teacher, street- 


THE GREAT COLLAPSE 183 

cleaner, highway builder, mail carrier and railroad 
owner. 

Labor will hesitate to support a public owner¬ 
ship which does not guarantee it the right to or¬ 
ganize in its own defense, and strike, if necessary, 
against the employer—state. 

Thus, from every point of view, it will be seen 
that public ownership per se is not necessarily even 
a partial victory for the collectivists’ program. 
The establishment of a state industrial feudalism 
may so paralyze the forces of labor, so weaken 
it in its struggle, that its ultimate emancipation 
will be postponed rather than hastened. 

Only a public ownership that will strengthen 
the arm of labor in its struggle for economic free¬ 
dom, that will facilitate the transformation of so¬ 
ciety from capitalism to Socialism, that will 
weaken the authoritarian state and strengthen the 
industrial functions of the state is worthy of the 
support of Socialists in particular and labor gen¬ 
erally. 

Public ownership is so imminent, there is so 
much demand for it from all quarters, that it is 
important to outline briefly the general principles 
of a public ownership that should be demanded 
and, nothing short of it accepted. 


184 


THE GREAT COLLAPSE 


If we are to be spared a period of popular 
lethargy towards the collectivists* demands likely 
to result from the disappointment of an over¬ 
expectant people in public ownership, at least 
these three elements indispensable to a sound pro¬ 
gram of municipal ownership should be insisted on. 

1. A sound policy of public finance. This is 
a troublesome question. Different groups in so¬ 
ciety advocate different policies, depending largely 
upon their economic interests. 

2. The establishment of a scientific adminis¬ 
trative organization. Inefficiency, lack of econ¬ 
omy and corruption have been the stock argu¬ 
ments against public ownership. 

3. The rights of those employed in the munici¬ 
pal or state-owned industry must not only not be 
curtailed but liberally extended. 

Each of these three elements will be discussed 


in turn. 


Chapter XIV 

PUBLIC OWNERSHIP AND FINANCE 

As a prerequisite to acquiring the surface, ele¬ 
vated and subway lines, the municipality should 
appoint a commission of engineering experts, who 
should be removed, as far as possible, from the 
influences of the traction trust, to study the entire 
transit problem. Taking all matters into con¬ 
sideration, the commission should determine which 
lines are essential to an efficient, unified and suffi¬ 
cient system of transportation for the people of 
Greater New York. 

Thereupon a Board of Appraisers should deter¬ 
mine the actual present physical value of the lines, 
rolling stock and equipment. But no single item 
should be estimated under any circumstances to 
be worth above original cost. 

Franchises should not be valued at more than 
what the city actually received for them. If the 
city received no compensation there should be none 
paid to the company, regardless of how much 
the present owners allege to have paid for them to 
the party to whom the franchises were originally 
granted. 


185 


186 


THE GREAT COLLAPSE 


Real estate owned by railroad corporations, by 
reason of the growth of the community, has in 
most cases risen in value entirely out of propor¬ 
tion to the original cost. To the extent that these 
properties are necessary to the transit system they 
should be appraised; but their value shall not 
exceed cost. 

All leases, contracts and agreements should be 
cut right through, until the original owners are 
reached. All red tape and complicated dealings 
must vanish, simplicity should take its place. 

No fear need be entertained regarding the dis¬ 
integration of the existing “systems.” There are 
no systems now. Only when all necessary lines 
come under unified control can system be instituted 
in place of the chaos and anarchy that now pre¬ 
vail. 

Working within the framework of present so¬ 
ciety with its established legal relations and con¬ 
stitutional guarantees, the city will have to 
indemnify the owners for the roads. The basis 
for such payment shall be the value established 
by a Board of Appraisers. To raise money for 
that purpose the city should issue municipal bonds. 
As matters stand to-day, they will be bought 
largely by the financiers. 


THE GREAT COLLAPSE 


187 


During the life of the bonds, the holders will 
be entitled to draw interest in the tens of millions 
of dollars annually. This annual tribute to be 
paid to the possessors of the money bags mirrors 
the absurdity of a system under which a com¬ 
munity is taxed to the extent of tens of millions 
of dollars annually, by a small group of people 
who have absolutely nothing to do with the pro¬ 
ductive, directive, or in any other constructive way 
with the industry. 

It is estimated there are $1,000,000,000 worth 
of bonds outstanding against the properties of the 
local transportation system in Greater New York. 
Judging by the few companies of which some sort 
of physical valuations were taken, over half of 
these outstanding bonds are not represented by 
property. 

Evens Clark, director of the Socialist Alder- 
manic Research Bureau, prepared a table of fig¬ 
ures from Reports of the Public Service Commis¬ 
sion and the Tax Commsision for 1918, showing 
the outstanding securities of the railroad com¬ 
panies upon which the public is expected to pay 
interest and dividends and the values of the 
properties upon which the corporations pay taxes. 
The following is an extract from that table: 


188 


THE GREAT COLLAPSE 


NAMES OF COMPANIES 

Securities 

Outstanding 

Value of Property 
Reported to Tax 
Commissioner 

Hudson & Manhattan R. R. Co. 
N. Y. Consolidated R. R. Co... 
Second Avenue Line. 

$122,360,183 

102,550,000 

10,722,000 

95,838,889 

70.333.961 

66.620.962 

$21,898,000 

38,501,539 

3,596,761 

57,511,301 

25,935,223 

45,047,792 

New York Railways System. .. 

Third Avenue System. 

Brooklyn Rapid Transit System 


These figures are self-explanatory. 

Of the various lessons to be drawn from these 
figures this stands out, namely, that the value of 
the properties are far less than the outstanding 
securities indicate. The probable present phys¬ 
ical value of the roads in Greater New York, de¬ 
termined on the basis laid down for the appraisers, 
would be less than $500,000,000. 

Assuming the interest paid on the bonds now 
outstanding to be only 5 per cent., and assuming 
the municipality will pay as high a rate on its 
bonds it will still save over $25,000,000 annually. 
Added to this the millions paid every year in 
guaranteed dividends and in rentals, the city 
would save from $50,000,000 to $75,000,000 
annually. 

There are methods of obviating the private 
bankers entirely. Other countries have paved the 
way. Belgium solved its problem of finance for 
municipal enterprises by organizing the “Credit 











THE GREAT COLLAPSE 


189 


Communal,” an inter-municipal bank. Belgium 
learned by experience how not to pay millions of 
dollars in interest to private bankers. It found 
the collective credit of the municipality, properly 
organized, to be just as good and better than the 
private banks. 

“In order to facilitate for the municipalities the 
loans that they are often obliged to negotiate at 
the time of undertaking any work of local utility,” 
says E. Vendervelde, “the Government, at the 
suggestion of a Socialist, Haeck, encouraged the 
establishment of the ‘Credit Communal,* a cor¬ 
poration having no other stockholders than mu¬ 
nicipalities; . . 

Scarcely had this bank been established when 
its organizers were authorized to found another 
bank, the General Savings Annuity Bank. These 
banks are highly successful. 

With all the hundreds of millions of dollars 
going through private banks, annually, in the car¬ 
rying on of municipal business in New York 
State, an inter-municipal bank would be a most 
powerful financial institution. 

A corporation, organized under the laws of 


* Socialism vs. the State, E. Vandervelde, p. 151. 



190 


THE GREAT COLLAPSE 


New York, with municipalities as the sole stock¬ 
holders, the inter-municipal bank would soon be¬ 
come a clearing-house for all municipal financial 
transactions. Branches could be conveniently 
established in different cities. The purpose of 
this bank would not be to charge large under¬ 
writing fees, nor to hold business up for usurious 
interests, nor to manipulate the financial market 
for private profit, but rather to become a social 
instrument to facilitate social effort. 

The taking over of the entire transit system 
would no doubt be the greatest single enterprise 
yet undertaken. To leave the finances of a busi¬ 
ness involving hundreds of millions of dollars to 
the city administration to be handled in the same 
manner as the other municipal finances are han¬ 
dled, is deliberate business suicide. Even if the 
city were not in the hands of Tammany with its 
notorious appetite for things glittering, there would 
still be objection to confusing the finances of the 
Municipal-Governor with those of the Municipal- 
Transporter. There must be financial autonomy 
for the railroad business. The budget of the In¬ 
dustrial-Government must be completely divorced 
from the budget of the Police-Government. 


THE GREAT COLLAPSE 


191 


Rules of strict accounting should be maintained. 
The necessary funds for repair, deterioration, re 
placement of properties, redemption of bonds, as 
well as a general reserve fund for all sorts of 
emergencies, should be established. 

Bonds issued for the purpose of raising money 
to pay for the roads or for building extensions and 
new lines, must be amortized. Under the pres¬ 
ent arrangement the fare-payers must cover all the 
expenses, including the amortization of the bonds, 
which is another way of making them pay for the 
first cost of construction. 

This seems to be unjust and unsound. It is 
sufficient if the fare is large enough to cover the 
maintenance of the roads at top-notch efficiency, 
the cost of operation, and the maintenance of a 
reserve and replacement fund. 

The owners of real estate in undeveloped or 
partly developed sections of the city, as well as 
those owning property in the business heart of 
the city, should pay all or part of the cost of first 
construction, in as much as the benefit derived 
from a proper system of transportation accrues to 
them in the form of increased real estate values. 

Subways, such as the city has built and is now 


192 


THE GREAT COLLAPSE 


in the process of building, extending as they do be¬ 
yond congested centers, add very greatly to the 
value of real estate in those districts which have 
not been built up prior to the construction of these 
subways because of lack of transit facilities. It 
is a matter of common knowledge that the real 
estate values in Washington Heights, The Bronx 
and in the business section of the lower part of 
Broadway, due to the building of the subways, 
have risen enormously. Rent profiteering in The 
Bronx particularly reached scandalous propor¬ 
tions. 

Shall the real estate interests be permitted to 
enjoy exclusive financial benefits from the com¬ 
munity-built rapid transit? Shall the fare-payers 
be taxed at both ends of the pole? Shall they 
pay for the construction of transportation lines and 
also pay higher rents because of having con¬ 
structed these lines? Clearly, this is not just. 

A commission should be appointed to make a 
careful and scientific study of the areas and extent 
to which real estate values have risen by reason 
of the construction of transportation lines. 

The “unearned increment” thus ascertained, 
should be assessed to the full amount, and the 
money used for an amortization fund to retire all 


THE GREAT COLLAPSE 


193 


bonds issued by the municipality for the purpose 
of purchasing the traction system. If these assess¬ 
ments are in excess of the funds needed for amor¬ 
tization, the residuum may be used to build exten¬ 
sion routes and new lines in sparsely-populated 
sections in order to develop this metropolis to its 
full possibilities, and relieve its congested neigh¬ 
borhood in which people are herded like cattle. 
The principle of assessing the rise in real estate 
values due to public improvements should be ap¬ 
plied to all extensions and new lines built. 

If, however, these assessments do not yield 
sufficient to cover the amortization of the first cost 
of construction, or the bonds issued for the purpose 
of acquiring the transportation system, the fare- 
payers should supply the difference. 

Another way of obtaining the same results is 
by issuing assessment bonds against each piece of 
property for the full amount of the “unearned in¬ 
crement,” which would not be a lien upon the 
city, but upon the property assessed. The only 
objection to this method is the comparative diffi¬ 
culty the marketing of these bonds would present. 
With an inter-municipal bank this difficulty would 
be obviated. 

The principle of assessment bonds is already 


194 


THE GREAT COLLAPSE 


in operation covering local improvements. The 
cost for street openings, pavements, sewers and 
such other expenses is defrayed by assessing the 
property in the vicinity benefiting therefrom. 

There has been a tendency of late to establish 
public ownership for fiscal reasons. When the 
State, monarchical or republican, by reason of its 
general extravagances and huge military and 
naval appropriations swells the budget beyond a 
point where, what is called legitimate taxation, 
does not suffice to finance it, it embarks upon a 
policy of government ownership of certain recog¬ 
nized monopolistic industries for what it can get 
out of it. 

With the tremendous war loans and the inter¬ 
ests they bear there will be a strong temptation on 
the part of our own government to go into public 
ownership and use the profits for the purpose of 
relieving the taxpayers. In municipalizing the 
traction system in this city care must be taken, 
therefore, that the fiscal considerations for gov¬ 
ernmental purposes shall play no part at all in the 
arrangement. The principle of public ownership 
is social service, convenience and safety to the 


THE GREAT COLLAPSE 193 

public, and decent, human treatment and proper 
pay to those employed in the system* 

Under public ownership fares would be r<t» 
duced instead of raised. 

A derivative table of figures for 1918, pre- 
pared by Mr. Clark from data in the Reports 
of the Public Service Commission, show, among 
other things, the actual cost of carrying passen¬ 
gers on New York local lines and also the profits 
made upon each passenger: 


NAMES OF COMPANIES 

Average Cost 
to carry Pas¬ 
sengers in 
Cents 

Average 

Profit Madtf 
on Each 
Passenger 
in Cents 

Interborough Rap. Tr. System.. 

2.6 

2.4 

New York Railways System.... 

3.8 

1.2 

Third Ave. System. 

3.8 

1.2 

Brooklyn Rapid Transit System. 

3.7 

1.3 

N. Y. Consolidated R. R. Co.... 

2.8 

2.2 

Hudson & Manhattan R. R. Co. 

3.7 

3.3 


These figures are highly illuminating in view 
of the persistent demand for higher fares. 

The outstanding fact is that with all the waste, 
high salaries and bonuses to officials, the known 
figures prove that the fares could be considerably 
reduced. 

Under a unified system of operation and con- 








1 % THE GREAT COLLAPSE 

trol the principle of one-city-one-fare could be 
realized. 

Autonomy of finance in government industries, 
the divorce of the Industrial-Government from 
the Police-Government has as its indispensable 
compliment autonomy of administration. 


Chapter XV 


PUBLIC OWNERSHIP AND ADMIN¬ 
ISTRATION 

Along with the promise on the part of the lead¬ 
ing railroad companies that they will go bank¬ 
rupt, a promise they at this writing have redeemed, 
there was instituted a powerful and incessant 
propaganda against public operation of the roads. 

The principal arguments used against the mu¬ 
nicipalization of the traction systems were these: 
The government is incompetent. It cannot be re¬ 
lied upon to do practical work. Political corrup¬ 
tion, political favoritism, political interference in 
the management of this gigantic industry will re¬ 
sult in inefficiency and lack of economy. The 
service will be demoralized. 

However true these arguments are, the com¬ 
panies are least qualified to make them. Their 
testimony cannot be taken at face value because 
they are interested witnesses. It is they and mem¬ 
bers of their tribe who corrupted public officials 
by bribing them in order to get franchises. They 
duped administrations to surrender to them the 
city’s traction system. They have financed and 


197 


198 


THE GREAT COLLAPSE 


supported the parties in power. They have bit¬ 
terly opposed those who sought to effect a change 
either in the form or substance of the present gov¬ 
ernment. They have clamored for the imprison¬ 
ment of those who wished to purify the govern¬ 
ment and purge it of its vices. They, therefore, 
are not fit to hold up the government of their own 
creation to ridicule and contempt. 

Municipalizing the traction systems does not 
necessarily mean politicianizing them. Undoubt¬ 
edly, if the roads are to be municipalized there 
must be complete separation between the political 
administration of the city and the administration 
of its railroads. It would be disastrous indeed if 
the political ward-healers were to have power to 
temporize with this industry. 

The present method of extending government 
functions is by erecting additional departments, 
which become a part of the political state, sub¬ 
ject to all the political influences and shortcom¬ 
ings characteristic of our government. This must 
be guarded against in the public ownership of rail¬ 
roads. Although all precedent is in favor of the 
department, results at home and the experience of 
other countries argue against it. A distinction 
must be made between the extension of a govern- 


THE GREAT COLLAPSE 


199 


ment function political in its nature and one that 
is industrial. 

It would be deplorable indeed if the depart¬ 
ment method of administration were pursued. 
Should the Department need locomotives, or rails, 
or coal, or anything else, it would have a resolu¬ 
tion introduced in the Board of Aldermen. Some 
diligent members of the majority happen to be ab¬ 
sent. The minorities desirous of settling ever¬ 
present grievances against the party in power 
would take advantage of the situation to block 
the ordinance. While the Aldermen were play¬ 
ing politics, trying to find out whether the con¬ 
tract is to be made “with public letting” or “with¬ 
out public letting,” the business would be ham¬ 
pered. 

Department administration opens the door to 
Tammany Hall, or for that matter, to any other 
political organization happening to be in control. 
A department is usually the servant of the ma¬ 
jority party instead of the city as a whole. For¬ 
mally, orders to the administrators of the depart¬ 
ment are given by the elected officials, actually the 
orders are framed by the political boss. The elec¬ 
tion district captains and the district leaders who 
need patronage to insure success at the polls would 


200 


THE GREAT COLLAPSE 


multiply the present political corruption if they 
had a department in charge of a half a billion 
dollar business at their disposal. They could play 
havoc with their opponents. 

A corporation should be organized, an organi¬ 
zation of a special kind, clothed by law with civil 
personality, and act in its own name as owner of 
the transit system. The corporations should be 
governed by a board of directors consisting of 
representatives of the city elected by the Board of 
Aldermen and the employees of the lines. 

Of the directors representing the city each rec¬ 
ognized political party in the Board of Aldermen 
should be entitled to representation proportional to 
the vote cast for that party at the last regular elec¬ 
tion. In that way a true cross-section of the peo¬ 
ple’s will can be secured on the Board of Direc¬ 
tors. Such an arrangement will also remove from 
the administration of the industry the absolute rule 
of the majority so brutally and disastrously em¬ 
ployed in the administration of the political affairs 
of the city. 

The employees must be represented on the 
Board of Directors for their own protection and 
for the best interests of the roads. Representa¬ 
tion on the board will bring the working force 


/ 


THE GREAT COLLAPSE 


201 


into direct contact with the shaping of the policies 
of the industry. 

The general legal features of a private corpo¬ 
ration would characterize this public corporation, 
except, of course, there would be no stock, no divi¬ 
dends, no profits and no selfish interests to be 
served. The corporate method should be bor¬ 
rowed from capitalism because it secures auton¬ 
omy, the only guarantee of success in public 
ownership. 

The corporation should have power to name 
the management. Responsibility must be decen¬ 
tralized. Efficiency and economy depend upon 
the avoidance of rigid bureaucratic rule. 

“In the administrative, like the political or¬ 
der,’’ says E. Vandervelde, a Socialist theoretician 
and a practical man, “the characteristic of the 
present system is centralization pushed to the ex¬ 
treme. 

“From top to bottom, in almost any administra¬ 
tion a system of management reigns looking much 
more to decision than to execution, paralyzing in¬ 
itiative and suppressing responsibility. In the Bel¬ 
gian State railways, for example—and as much 
might be said for other countries—an engineer in 


202 


THE GREAT COLLAPSE 


charge of a shop cannot modify in any way the 
processes of the system of operation in the service 
which is directly entrusted to him without the au¬ 
thorization of his chief, who in his turn has to ask 
the authorization of the management, which again, 
in most cases, has to ask the approval of the coun¬ 
cil of administration. 

“In short, every initiative has to pierce three 
zones in which it has much chance of meeting ob¬ 
stacles in routine ignorance or hostility. If it 
starts from a man of much will power, it will over¬ 
come these obstacles, but as men of this type form 
the exception the initiative quickly finds itself re¬ 
buffed, and oftener than not it ends by becoming 
null”* 

Those who have been employed by one of the 
state or city departments and have been victimized 
by its red tape and bureaucratic management will 
appreciate the picture drawn by Vandervelde. 

Private ownership, at the pain of extinction, 
has learned to decentralize the management of 
industry. General decisions are made on top 
while the initiative for particular application of 

* Collectivism and Industrial Evolution, E. Vande- 
pelde, p. 131. 



THE GREAT COLLAPSE 


203 


these decisions are left to those who are entrusted 
with the actual work. Individual initiative and 
responsibility go together. 

As authoritarian a state as Prussia of the 
Kaiser had learned to give its industries adminis¬ 
trative autonomy. It could get results in no other 
way. 

A French engineer, M. Weiss, hostile to 
government ownership of coal mines, has this to 
say about the government-owned mining industry 
of Sarre: 

“Considered as a whole, the Administration of 
Mines is endowed with a strong organization, 
which permits it to compete in the industrial field 
with the best managed private enterprises. We 
must say that in spite of the habits of authority in¬ 
herent in the race, in spite of what may be called 
Prussian militarisms, the administration is highly 
decentralized; responsibilities are well defined; a 
large initiative is left to the agents who carry out 
orders. . . The working force is well disciplined 
and profoundly attached to the mine. It is 
through this solid organization that the Prussian 
State, operating the largest mine field in the world 


204 


THE GREAT COLLAPSE 


has arrived at brilliant results , in spite of the diffi¬ 
culties in all State operation.”* 

The phenomenal success of the Swiss railway 
system is ascribed by the students of the question 
chiefly to its complete administration autonomy 
as regards the Central Government which owns it. 

Although the members of the directing board 
are appointed by the Federal Council, the Federal 
Assembly and the different Cantons—all of which 
are government bodies—the divorce of the admin¬ 
istrative functions of the railroad system from the 
functions of the government as such, is so complete 
as to remove all political influence and bureau¬ 
cratic red tape from the successful management of 
the roads. 

Municipal ownership of the transit system in 
New York will be successful only when we, 
profiting by the experience of other countries and 
borrowing the good features of private owner¬ 
ship, will establish complete financial and admin¬ 
istrative independence of the roads. 


* Quoted in Socialism vs. the State. E. Vandervelde, 
pp. 168-169. 



Chapter XVI 


PUBLIC OWNERSHIP AND THE 
WORKERS 

One of the most perplexing problems the pro¬ 
ponents of public ownership must solve before 
labor will embrace their program is the establish¬ 
ment of proper relations between the working 
force and the government. 

The old conception of a government employee 
is incompatible with his modern status. When 
the State was little else than a policeman its em¬ 
ployees were functionaries. They were agents of 
the sovereign power. In fact, while in office they 
were the soverign power. 

To have permitted these functionaries to or¬ 
ganize into a union would have been equivalent 
to permitting them to conspire against the public 
powers, against the State. If the organization had 
been effective it would have meant the setting up 
of private interests against the general interest. 
It was, therefore, perfectly logical to forbid pub¬ 
lic officials to organize. 

But workers employed in government-owned 
industries are not public officials. They are not 


205 


206 


THE GREAT COLLAPSE 


functionaries. There is a vast distinction between 
the government as policeman, as soverign, and the 
government as transporter, as employer, as busi¬ 
ness manager. 

The corollary of financial and administrative 
independence and their freedom from government 
interference is the independence of the working 
force and its freedom from the tyranny of rigid 
bureaucratic rule. 

The workers in a municipally-owned traction 
system would be helpless if each individual were 
left to himself to settle his grievances with the 
management. His chance of securing a respectful 
hearing would be remote indeed. Experience am¬ 
ply teaches that. 

The workers should be guaranteed the right to 
organize and strike, if necessary. They should be 
permitted to affiliate themselves with the rest of 
organized labor in order to augment their strength 
and to compare well with the almost inexhaustible 
economic strength of the employer-state. 

Under private ownership, although the workers 
are accorded the legal right to organize and strike, 
their “right” is often of no great value to them 
because of the gigantic and powerful corporations 
they must fight. A mere right to organize and 


THE GREAT COLLAPSE 


207 


strike under municipal ownership is not sufficient, 
for the municipality being even more powerful 
than any single private corporation could certainly 
reduce that “right” to nothing by assuming a stub¬ 
born and hostile attitude to its working force. A 
deliberate policy must be established of dealing 
with the workers collectively. Working-class or¬ 
ganization should be part of the organization of 
the business proper. 

Collective bargaining is now recognized as an 
effective deterrent of strikes. Machinery should 
be set up to settle disputes as they arise. The in¬ 
strument should include representatives of the 
working force, the management and a person 
chosen by both sides. 

It is to be presumed that along with a director 
of equipment, a director of supplies, a director of 
construction, etc., there would also be a director of 
labor. This director of labor, or whatever name 
the person in charge of labor be called, should be 
elected by the workers and ratified by the board 
of directors. An agent of the workers, by their 
own unmolested choice, the director of labor 
would enjoy their confidence. Being ratified by 
the board of directors, he would become the link 
between the workers and the board. By means 


208 


THE GREAT COLLAPSE 


of this link, differences may be adjusted without 
resorting to either arbitration or strike. 

As mentioned in the previous chapter, the work¬ 
ers in their organized capacity should be repre¬ 
sented on the board of directors by persons of 
their selection. This would devolve responsibili¬ 
ties upon the workers. Conscious that the deci¬ 
sions spring partly from their direct representatives, 
partly from their indirect representatives—for they 
are part of the community at large whom the 
Board of Aldermen represents, the workers would 
strive to execute those decisions with a will and a 
purpose that would insure successful service. 

The demand for democracy in industry is grow¬ 
ing more audible from day to day. If that be true 
of privately owned industry, how much more true 
is it of industries publicly owned? 

The suggestions here outlined are a mere begin¬ 
ning. With time the entire management of indus¬ 
try should be in the hands of labor. 


Chapter XVII 


PUBLIC OWNERSHIP AND SO¬ 
CIALISM 

Public ownership is not Socialism. Even if 
most industries were owned by the municipality, 
state and nation, it would still not be Socialism; it 
would be State capitalism. 

Socialism is predicated on three propositions. 

1. The nature of the State must change. It 
must cease to be a power of coercion and of domi¬ 
nation. It must become an organ of management 
of industry, of the coordination of human affairs. 
It must be constructive. 

2. There must be established a system of col¬ 
lective ownership and democratic management of 
all socially necessary means of production and 
exchange. 

3. All income derived from ownership must be 
abolished. Only by one’s labor, muscular or in¬ 
tellectual, shall one earn his livelihood. 

To-day the primary purpose of the State is 
domination; its secondary functions are the eco¬ 
nomic affairs of the people. 


209 


210 


THE GREAT COLLAPSE 


Under Socialism the primary purpose of the 
State will be the management of the economic af¬ 
fairs of the people; its secondary function will be 
political. 

The more functions of an industrial nature the 
State assumes, the more it enfeebles its authorita¬ 
rianism. 

The change in the nature of the State may 
come by degrees, peacefully, legally, or it may 
come by violence. Socialists desire a peaceful 
transformation, and they frankly say so. As to 
whether such will be the process depends more 
upon the powers that be than upon the Socialists. 

If political liberties are infringed upon, freedom 
of speech, press and assemblage denied, political 
corruption at the polls permitted and even pro¬ 
tected; if Black-Hundred organizations formed to 
hound economic heretics are encouraged and even 
subsidized; if workers are deported and sent to 
jail for their views, there may develop among la¬ 
bor a feeling of mistrust, a lack of faith in the 
entire legal machinery as an instrument of pro¬ 
gressive social change and ultimate emancipation. 

Working class tactics are generally determined 
by those who make the rules under which the 


THE GREAT COLLAPSE 


211 


workers find themselves rather than by their own 
desire. 

Public ownership of what is now generally un¬ 
derstood as public utilities is not sufficient, the 
Socialists claim. Modern industry has become 
social in its nature, and what is social in its nature 
should be socially owned. To leave such indus¬ 
tries to private individuals is a menace. And 
events have proved the truths of this. 

Socialists do not propose that the miners own 
the miners, the factory employees own the fac¬ 
tories, or the railway workers own the railways. 
They believe in collective ownership. 

It may be put this way: Generally, if the in¬ 
dustry is municipal-wide its ownership would 
reside in the municipality; if it is state-wide the 
state would own it; and if it is of a national char¬ 
acter, the nation would own it. 

The management of these industries, however, 
should be in the working force. The workers 
should elect their foremen, managers, superintend¬ 
ents, etc. They should have democracy in in¬ 
dustry. 

In discussing “Public Ownership and Fi¬ 
nance,” it appeared that under the present system 


212 


THE GREAT COLLAPSE 


of legal property rights and relations, even if the 
municipality acquired the traction lines, it would 
have to pay to the capitalists an annual tribute of 
about $30,000,000 to $40,000,000 in the form 
of interest. If Socialism merely meant the exten¬ 
sion of this method to other industries, the capi¬ 
talists would lose little, for the Government would 
collect a large tribute from the people and deliver 
it periodically to a parasitic class. Of course, that 
is absurd. 

Once society decides that the capitalist class is 
useless in the scheme of things, that capitalism is 
an anachronism, it will by the same force and 
power sweep aside all former property rights and 
relations, and will establish a code in harmony 
with the new social conditions. 

Under Socialism, income from legal possesion 
will be abolished. Unless a person is incapaci¬ 
tated either physically or mentally, he will have 
to work, to become useful. 

No parasitism under Socialism. 



















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